Digital Advertising: Bargain Bin or Trash Bin?

T. M. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Advertising is a vital part of the commercial market, often disappointing investors by piling expenses atop revenue; investing in advertising itself offers an opportunity to profit off those ever-present expenses. Three digital advertising agencies, Digital Generation (NASDAQ: DGIT), ValueClick (NASDAQ: VCLK), and Harte-Hanks (NYSE: HHS), exemplify some of the heights and depths (mainly depths...) of the sector. Are these cheap buys, primed to rise in value, or will the web continue to prove trickier to capitalize upon than investors hope?

Selling Yourself

Digital Generation is down 55% from its 52-week high, having dropped precipitously from May 2010, when DGIT traded at 400% its current price. It's currently looking to be bought out; Digital Generation offers an opportunity to make money on the forthcoming merger when a buyer is finally found. Its cash flow has managed to jump 150% from the previous quarter, but as it has been noted, an uncomfortable margin of their cash is due to a decrease in receivables. On the other hand, with receivables consistently making up roughly 50% of total assets over the last year, they could still unload a fair amount more -- continuing to prop their earnings up ahead of a buyout offer.

Is ValueClick a Value Stock?

$1.3B ValueClick offers a rosier picture with a PEG of 0.7, suggesting that it has a ways to grow out of its 20% drop from an early May 52-week high. Sales have increased over 5% since the previous quarter, while net operating cash has surged over 40%... though still down 37% from their December earnings. With earnings increasing and the stock undervalued against analyst predictions, ValueClick may manage to stretch toward its previous high.

ValueClick is not without its risk; current ratio has declined to 1.8 from a slightly-more-comfortable 2.5 the previous year, and the price-to-book clocks in at 2.8; the stock is, in other words, somewhat overpriced against its assets, but as bankruptcy certainly doesn't linger on the horizon, this is not a concern as they continue to expand and innovate.

Discounted Discounters

Harte-Hanks offers an interesting example of a company that is in the midst of making the digital advertising transition. Founded in 1923, you may know it better for discount rags like PennySaver, which now has an online presence through PennySaverUSA.com, and its sister-site, TheFlyer.com. Admittedly, this isn't the prettiest real estate on the web, reflected in Harte-Hanks's waning sales having fell an average of 7% over the last four years; over the past three quarters, sales have also seen an average 5.5% drop. The stock is down 33% from its 52-week high in early 2012 due to a massive loss this latest quarter.

This was a one-time write-off, however, and the stock has other fundamental positives. Debt has dropped steadily, and cash has seen a slow but steady increase since the previous quarter. The stock trades at a P/E of 13.12 and has been rising, slowly but surely, over the past year. Finally, it offers a 4.9% dividend yield; depending on your investing goals, this may prove to be the make-or-break factor in whether or not you choose to invest in Harte-Hanks.

Winding Down the Sales Pitch

Web advertising is certainly here to stay, and is an essential part of the digital economy. Some companies have more luck with adapting to the rapidly-changing web; others, like Google or Facebook, make their own rules, and the smaller fish swim in their wake. If we've learned anything from tech stocks over the past 20 years, it is that you can often rely upon them for volatility; the ability to capitalize on that volatility is a combination of timing and fundamental analysis.

Harte-Hanks and DG may very well be prime examples of this; HHS's recent blip in earnings has scared investors away, driving down the price, while DG is on the precipice of a potentially lucrative merger for shareholders. ValueClick, on the other hand, has been moving right along and offers a more classic example of a stable, smart investment, though we've “missed the boat” on its greatest lows. As usual with Mr. Market, yesterday's losers are tomorrow's winners, “new” economy or not.


tmloyd has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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