Stock Picks: GRMN Up, VCLK Down

Investors homed in on personal navigation device maker Garmin (GRMN) after it beat Street earnings estimates, sending shares 23% higher in a short-covering midmorning surge Wednesday.

Before the market opened the company reported that its second-quarter profit dropped to 81 cents a share -- far higher than the 51 cents analysts were expecting yet still a significant decline from the $1.19 a share it reported a year ago. Revenue during the quarter fell to $669 million from $912 million, a 27% slide.

CEO Cliff Pemble said sales in the marine segment and overall margin improvement blunted some of the impact of the world-wide economic slowdown. 

"While we're not seeing significant signs of economic recovery, we are starting to see some positive indicators," he said on a Wednesday conference call. "We expect to see sequential increases in shipments as retailers stock shelves for fall promotions and would anticipate stable pricing with some margin declines during Q3."

Morgan Joseph analyst Ilya Grozofsky thought the company's outlook was a little too optimistic. Garmin, he says, faces price declines due to increased competition from smartphones and other personal navigation device makers, which will lead to a commoditization of its lower-end products.

"We believe, in the current quarter, shelves are now fully stocked with Garmin products and other personal navigation device brands, increasing Garmin's competition for customers among the low-cost PND space," he wrote Wednesday. "As a result, we expect average sale prices to be weighed down as well."

While controlling costs helped Garmin boost its bottom line beyond expectations, Wednesday's double-digit stock price pop likely had more to do with the number of investors who expected them to fare worse as auto makers scale back production and shrink inventories.

As of July 24, almost 16% of the Cayman Islands-headquartered company's shares were held short, a significant percentage of its public float. The earnings beat triggered a short squeeze, in which investors were forced to cover their positions, rapidly driving up the price.

Scott Sutherland, an analyst with Wedbush Morgan, said Wednesday his outlook and price targets were under review, and mantained an Underperform rating on the stock.

Bottom Line: Sell
Take advantage of the bad bet and tight financial engineering that's driving the stock higher today. The gain won't last and growth won't be strong enough to support a significant organically-driven earnings increase in the future.

Investors didn't buy ValueClick's (VCLK) pitch after the online advertising firm beat Street earnings estimates but offered a softer outlook for the current quarter, sending shares down 15% in Wednesday midmorning trading.

The Westlake Village, Calif.-based company, whose brands include Commission Junction, Mediaplex and PriceRunner, reported earnings of 17 cents a share after the market closed Tuesday. The profit was flat compared to a year ago and exceeded Wall Street analysts' average, expected earnings of 14 cents a share for the quarter.

ValueClick management said it expected to earn 13 to 14 cents a share for the current three-month period, an estimate in line with modest Street expectations.

CEO Tom Vadnais said the company's lead generation business, which accrues personal information on web surfers and sells the information to its clients, fell short of its objectives but display advertising exceeded expectations."We're seeing the same trends here that we saw last quarter," he said. "Our lead gen offering is geared to drive large broad-based leads in volumes, while some demand has shifted to vertical lead gen specialists."

While investors were cautious about the company's prospects, some analysts see some bright spots in Valueclick's future. Jeff Rath, an analyst with Canaccord Adams, said the display business was poised for a recovery.

"Overall results in Q2 were good, as e-commerce trends and comparison shopping accompanied an improving display market," he wrote Wednesday. "However, we did not expect lead-gen to deteriorate as much as it did, and question whether keeping it as a core unit is reasonable (no signs of stabilizing)."

Needham & Co. analyst Mark May said ValueClick benefits from having one of the largest ad networks, with about 13,500 publisher partners and, an additional 50,000 publishers in its Commission Junction Marketplace business.

It has about 5,000 active advertisers and reaches about 70% of the U.S. Internet population with targeting technology that enables above-average page/ad yields.

"Though revenue and earnings growth could remain flat near-term given the recession and continued deterioration in the lead generation segment, we do think that ValueClick can grow again when conditions improve, that the model can continue to generate significant free cash flow and that there is asset value," he wrote.

Bottom Line: Hold
The disaply ad business should get a nice boost once the economy starts to recover, which will ultimately improve ValueClick's bottom line.