$50-$55 Per Share Predicted By Year-End As Earnings Estimates Move Upward For DG FastChannel (DGIT) Says Industry Analyst
July 6, 2010 - The Wall Street Transcript has just published S&L, Investment Bank and Asset Management Report offering a timely review of the General Investing sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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James A. Bitzer, MBA, CFA, Senior Managing Director and Director of Research, joined Falcon Point Capital, LLC in 1998 from Prudential Investments, where he was Managing Director and Senior Portfolio Manager of the US Small Cap team. Mr. Bitzer spent a year in London managing Prudential's European small cap operations. Prior to his tenure as Managing Director, Mr. Bitzer served as Vice President, Corporate Finance of the Prudential Capital Group, where he originated and managed a portfolio of over $2 billion of debt, mezzanine and equity securities.
TWST: What are some examples other than the few you just mentioned that you feel are representative of your long approach and the reasons you found them attractive?
Mr. Bitzer: Another stock that we have owned for about a year that has been one of our best performers this year is DG FastChannel (DGIT). DGIT is a $1 billion market cap company based in Dallas, Texas. The stock is around $39 per share today, but we think it can move to the $50 to $55 level by year-end as earnings estimates move upward. The next couple of years will be a fabulous earnings period for the company. DG FastChannel is a play on the proliferation of High Definition TV (HDTV) and the growth of HDTV sets. The company has a unique model. They format, catalog and provide closed captioning for commercials and then deliver these TV commercials to stations across the U.S. over its electronic network. DGIT gets paid a small fee per delivery, but their fee for an electronic delivery of an HD commercial is 10x that of a standard definition (SD) commercial.
The company has a very high market share of the electronic delivery market as it's acquired a number of competitors over the last four to five years. The electronic delivery is much more efficient than the old method of making tape hard copies and using FedEx to overnight them to all the stations. With advertising improving and the migration to HD commercials, the company's earnings and revenue have been exploding. Revenue grew 31% in the most recent quarter while earnings increased 350%. Significant earnings leverage occurs because the cost of electronic delivery over its network is fixed. The stock has gone from $15 to about $40, and we have trimmed some of our stock over $40 a share, but we continue to see further upside. We estimate that the company earns north of $2 in 2011 and almost $3 by 2012.
TWST: Very good examples. It brings out a question, how do you find the specific stocks that are selling at a bargain and how terrific growth potential work? What exactly do you do with your research to find these types of companies?
Mr. Bitzer: We find them in several ways. First of all, we run screens on our universe each week. These screens relate to top line growth, earnings growth, and have multiples or P/E constraints. We run insider buy screens, and enterprise value to EBITDA screens as well. A lot of stocks can come out of these screens, but because we've been in the business so long, we are able to apply a qualitative screen to weed out companies or management teams we don't care for. We also visit with 400-500 companies in person each year and conduct hundreds of phone calls. We create a Focus List of companies we like and monitor these for attractive entry points. Recently we're finding more names that are worthy of buying, or adding to, because the stocks have been declining to areas that might be good entry points.
TWST: Tell us a little bit about the short side of your portfolio and how you find those and what percentage you do keep in short?
Mr. Bitzer: The Long/Short strategy typically runs with a long bias. Typical net exposure is somewhere between 20% and 60% net long. Today, for instance, we are about 28% net long. We run screens for shorts as well, with different characteristics of course. The shorts are often highly valued stocks where we think the fundamentals have either peaked, or are deteriorating. We expect them to either lower earnings or revenue guidance, or disappoint the Street over the next six months in some fashion. We are always looking for a catalyst that will drive the stock down. We visit these companies as well; however, we don't talk about our short names in publications. The shorts have been helping quite a bit in this downturn but we have been reducing them in the last several weeks as they hit our price targets and we feel that additional downside is unlikely.
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