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Wednesday, July 19, 2006

Digitas Get Decapitated

Stocks: (DTAS)

Shares of Digitas dove 23% on the company's outlook for the current quarter and the year.The company owns interactive ad agency Modem Media and Medical Broadcasting which offers digital marketing to healthcare companies.

After announcing that the second quarter fee revenue (which backs out pass-through revenue from clients) rose to $100.5 million from $87.6 million last year, the company said Q3 would could clock in at as low as $93 million. For the year, fee revenue is expected to be $380 to $395 million.

The company put on a game face: "While I am disappointed in our reduced near-term outlook, due to a handful of specific client challenges, our largest and longest-standing client relationships remain strong. In addition, we have a more diverse set of clients with the potential to grow over the long-term," said Chairman and CEO David Kenny.

Perhaps the CEO's comments were something other than unfounded optimism. Digital makes good money. Operating income for Q2 was $11.7 million. The company has cash and equivalents of about $185 million. Receivables and payables are about the same. The company's market cap is not $713 million with the stock at $7.90. Its 52-week high was $14.99. At this point, the company trades at well under two times fee revenues when cash is backed out.

Digitas is not in as bad a spot as the market thinks. The stock is cheap now.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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