Pathfire Buy Boosts DG FastChannel: Oppenheimer

Oppenheimer & Co. cable and satellite analyst Tom Eagan took over coverage of DG FastChannel April 25, the day after the digital media services provider announced its $30 million acquisition of rival Pathfire, with a “buy” rating, raising his 12-month price target on the stock to $21.50 per share from $16 per share.

In his report, Eagan wrote that DG FastChannel is positioned to take advantage of several emerging trends in the advertising distribution industry, including:

• HD: With pricing for electronic distribution more than 10 times that of standard definition, Eagan estimates that DG FastChannel should enjoy long-term revenue growth. He estimated that less than 1% of the company's volume is distributed in HD and expects that to rise to 5% by the end of 2008.
• Consolidation: The purchase of Pathfire and its recent buy of Point.360 — a leading provider of both high-definition and standard definition digital media mastering services — for about $34 million, should increase market share and boost cash flow margins.
• Online: Eagan predicts significant video expansion online will drive advertising requirements providing a new platform for DG FastChannel.

Eagan believes that DG FastChannel will meet or exceed its revised 2007 cash flow guidance of $35 million to $38 million. He also expects it to meet or exceed its first quarter cash flow guidance of between $5.8 million and $6.1 million.

While the stock has risen 32% ($4.33 per share) so far this year, Eagan believes the market is underpricing the shares — DG FastChannel trades at 9 times estimated 2007 cash flow compared to 10.6-to-15 times multiples for its peers.