Demand Media: Zacks’Bull of the Day Play

Demand Media (DMDSnapshot Report) has seen estimates move higher over the last 30 days. Add to that the fact that the company has topped the Zacks Consensus Estimate in five of the last six quarters and you have an interesting story on your hands. Combined, the earnings estimates increases and the solid history of beats have helped push the stock to a Zacks Rank #2 (Buy) and today it is the Bull of the Day.Marketplaces and Content

The strategy for Demand Media is two fold. The first part is to be the platform for artists to create and sell their products. These range from phone cases to t-shirts via Society6 to works of at being sold via Saatchi Art.

The second end of the strategy is delivering strong content sites to users such as Livestrong.com, eHow and Cracked.

Description

Demand Media is a diversified Internet company comprised of several media and marketplace properties. Demand Media was founded in 2006 and is headquartered in Santa Monica, California.

Earnings History

As noted above, the company has topped the Zacks Consensus Estimate in five of the last size quarters. These were not small beats, with only one of the five eclipsing the estimate by a penny. The last three beats were $0.33, $0.48 and $0.13 and they translated into positive earnings surprises of 49%, 64% and 27% respectively.

The most recent report on November 11 saw the company post a loss of $0.35, but that was $0.13 or 27% better than the $0.48 loss that was expected. Investors liked what they saw from this report and shares rallied for more than 15% in the session following the release.

Valuation

The valuation for DMD is one that is not as cut and dry as most. With negative EPS, our stand by method for valuation (PE) is not meaningful here. When we look at price to book, we see the 1.3x multiple for DMD is well below the nearly 5x industry average. The price to sales multiple of 0.8x is also far less than the 5.4x industry average.

One reason for the low valuation is that revenue has been declining over time. Sales shrunk 56% in 2014 and are expected to decline by 26% in 2015. 2016, however, is expected to show a revenue increase of 7.8% so most of the bad news about revenue growth is either history or likely priced into the stock.

Chart

Zacks has developed a chart that helps investors see how earnings estimates have impacted the price of the stock over the last several years. We call this chart the price and consensus chart, and each color coded lines represents analyst estimates over a designated year. As estimates increase, the stock tends to follow. The Zacks Rank is impacted by earnings estimate increases, beats and incorporates the idea of analyst agreement and magnitude. As a Zacks Rank #2 (Buy) we see that estimates are moving higher.

Follow Brian Bolan on twitter at @BBolan1

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Stocks Under $10, an investor service , where he recommends the stocks in the portfolio.

Brian also runs the brand new Zacks Game Changers where he looks for stocks that are disrupting their industries and reaping big gains.

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