Ad network, cash flow make ValueClick look undervalued.

SHARES of ValueClick Inc., one of the world's largest online marketers, received a nice bump in the wake of last month's report of solid second quarter results. The stock rose from around $14 per share to about $18.

Now, several analysts are saying the best is yet to come for the Westlake Village firm, which specializes in online applications for search marketing, display advertising, lead generation, ad serving, e-mail technology and comparison shopping.

The company's second quarter revenues of $130 million were well above analysts' expectations of around $120 million. ValueClick generated about $30 million in free cash flow and ended the quarter with $188 million in cash, or $1.90 per share.

Analysts are expecting the stock to move to about $22 to $24 per share by year's end.

"We think it's undervalued for a couple of reasons," said Richard Fetyko, an analyst at Merriman, Curhan and Ford. "This is one of the largest online ad networks in the United States."

ValueClick was founded in 1997 and took on a leadership role in the sector as the online advertising market developed. The company created networks of publishers and more than 5,000 advertisers, including eBay Inc., Visa USA Inc., Wells Fargo & Company, Nissan, Dell Computer Corp., Hewlett Packard Development Co. and Expedia.com. Advertisers were charged for display ads, search and email marketing and lead-generation ads priced on a performance-driven basis.

The company, whose symbol is VCLK and is traded on the Nasdaq, was aggressive in its buy-back program. ValueClick repurchased 5.9 million of its shares for $88.4 million and year-to-date has bought back 6.9 million shares, or 6.5 percent of available shares.

Fetyko estimated that the continued cash flow in 2006 would yield an additional $65 million in the second quarter and said that his firm was raising its estimates on ValueClick for 2006 and 2007.

"They have an impressive amount of cash flow," Fetyko said. "They have been buying back their own shares, which is a good sign. I think they'll be riding the coattails of the online advertising trend for a long time."

Fetyko pointed out that the unit at ValueClick facing the largest challenge was the search marketing division, which the company would like to see emulate similar divisions at Google and Yahoo.

"Probably the biggest opportunity they've missed is this one," Fetyko said. "They don't have a strong search marketing offering. But they still have a fair amount of cash."

According to analyst Heath P. Terry of Credit Suisse, the earnings upside was due to a combination of better revenues and solid operating expense control.

"We continue to believe that ValueClick will benefit from the strong operating environment within online advertising," Terry wrote. "With a broad base of assets in affiliate marketing, analytics and advertising networks, we believe that ValueClick is well positioned to take advantage of the accelerating shift of ad dollars online."

Terry wrote that ValueClick will benefit for the strong operating environment within online advertising and he predicted that the company would outperform, raising its price target to $22 a share.

Acquisitions pay off

ValueClick also recently installed a technology upgrade for its European display advertising, facilitated by its Sept. 2005 acquisition of FastClick. With the technology in place, ValueClick clients worldwide now have access to the full functionality of its network, including advanced targeting, campaign management and reporting tools.

The company will also benefit from its recent agreement with one of its subsidiaries, Mediaplex, and EyeWonder Inc. to provide advertisers and agencies with a combination of integrated ad serving, rich media and video ad technology and services. The pact gives Mediaplex clients direct access to EyeWonder's suite of advanced rich media and video ad products, including expendable and floating advertising.

"This new relationship is a unique combination of the industry's most comprehensive online ad server technology and the Internet's leading rich media and video ad products, reporting and services," said ValueClick President Tom Vadnais.

ValueClick Inc. (Nasdaq. VCLK)

YEAR (Dec. 31)                   2005      2004

Revenue (millions)               $304      $169
Total Expenses (millions)         240       134
Operating Income (millions)      64.4      35.5
Net Income (millions)            40.6      31.2
Earnings Per Share              $0.45     $0.37

SUMMARY

Business: Online advertising sales
Headquarters: Los Angeles
CEO: James R. Zarley
Market Cap: $1.7 billion Dividend Yield: N/A
Total Liabilities: $111 million
P/E Ratio: 35.87
Long-Term Debt: $0.0

[GRAPHIC OMITTED]