Jefferies & Co. upgraded its rating on shares of Demand Media Inc (NYSE: DMD) to buy from hold based on strong first quarter results, with a price target of $22.

Demand Media reported solid top-line/operating income before depreciation and amortization (OIBDA) beat on better page views and revenue per thousand page views (RPM) growth. While Owned and Operated websites (O&O) traffic growth will moderate short-term as the company works on improving its algo rankings post Google Inc.'s Panda tweak, improved volume and RPMs on branded sales should help sustain strong growth rates in 2011, said Youssef Squali, an analyst at Jefferies.

Demand Media reported net revenues (excluding traffic acquisition cost or TAC) of $76.3 million, up 49.8 percent, versus consensus of $69.0 million and the company’s guidance of between $69.0 million and $73.5 million. Adjusted OIBDA came in at $20.15 million, up 78.39 percent year-over-year versus guidance of $16.0 million to $17.5 million and consensus of $17 million. Earnings were $0.06 per share versus consensus of $0.04 per share.

Revenue on O&O websites were $40.5 million, up an impressive 93.6 percent year-over-year, due in part to growth of premium branded ad sales. Over 50 percent of eHow.com pages currently have branded ads. RPMs on O&O sites were up over 46 percent year-over-year, to $15.69 versus $10.72 a year ago, as more branded ads were deployed across eHow.com and other properties.

Branded ad sales tripled year-over-year as the company added several brand advertisers over recent quarters. Additionally, the mix shift towards eHow during first quarter of 2011, possibly as a result of Google's original Farmer algo update, was also a driver of the RPM improvement.

Page views on O&O sites were up 32.1 percent year-over-year to 2.6 million from 1.9 million a year ago, while page views on network sites were up 37.4 percent year-over-year to 3.8 million from 2.7 million a year ago.

As a result of Google’s second “Panda” algo tweak in April, eHow.com's traffic was adversely affected by about 20 percent versus the pre-February level. That said, management guided to page view growth comparable to second quarter of 2010's low-20 percents year-over-year.

Squali said Demand Media is focused on improving content quality by removing 'uncurated' legacy user generated content on eHow, adding a 'curation layer' which allows greater feedback and focusing on feature length articles to improve search engine visibility.

Additionally, while in its infancy, the company is driving traffic to Cracked.com through Facebook. While page views growth will be more moderated than previously estimated short-term, they should be offset by a significant RPM rise year-over-year due to premium branded ad sales. We are tweaking our estimates to account for the lower traffic; higher RPMs, said Squali.

The brokerage lowered its 2011 EPS estimate for Demand Media to $0.20 from $0.23 and its 2012 estimate to $0.39 from $0.44. The brokerage raised its 2011 revenue estimate to $86.2 million from $85.4 million and its 2012 estimate to $125.5 million from $125.2 million.

Demand Media stock closed Thursday's regular trading up 3.56 percent at $16.31 on the NYSE, while in the after-hours the stock grew 7.91 percent to $17.60.

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