Freddie, Fannie Facing Facts

More talk about a U.S. government bailout for Fannie Mae (FNM) and Freddie Mac (FRE) today spells doom for shareholders of the government-sponsored enterprises (GSEs).? Fannie shares are down 6.6% near mid-day trading, while Freddie is down nearly 15%.? Then again, who besides day-traders are getting within a ten-foot pole of either holding these days?

Perhaps this lends perspective to the fact that speculative Lehman buyout news today has generated bullishness in today's market, whereas the FNM and FRE gloominess hasn't put the same pressure on stocks downward.? Both stocks are at Zacks Rank #4 (Sell).

Fannie Mae's last two quarters had posted earnings surprises of -229% (June) and -414% (March).? Freddie Mac recently had 5 analysts downwardly revise earnings estimates for the September quarter in the last month, and 6 for fiscal years 2008 and 2009.? Avoid like the plague.

UTStarcom Keeping Grounded

UTStarcom, Inc. (UTSI), a provider of IP-based telecom equipments, announced encouraging second quarter 2008 financial results, above our estimates.

This was primarily due to growing acceptance for the company?s IPTV solutions and personal communications devices (PCD). We believe market demand for the company?s IPTV and optical transport solutions remains firm as opportunities appear respectable at several carriers in Asia and Latin America. Recent divestiture of the PCD and mobile solutions businesses will foster adequate focus on the company?s core IP-based business, while simultaneously improving overall margins.

The company is in the midst of transitioning its focus on the Chinese PAS infrastructure and handset segments to an expansion of its equipment offerings for the global markets. However, we do not expect UTStarcom to achieve profitability any time soon. In addition, the market for IPTV solutions is highly competitive and this, together with global economic weakness, may hinder efforts to improve the company?s earnings power. We, therefore, maintain our Hold rating on the shares.

UTStarcom is difficult to value on the basis of P/E in view of negative earnings performance. On the basis of enterprise value (EV) to 2008 sales, UTStarcom is trading at 0.11x, which is significantly below the 1.1x peer group average. We set the same six-month target valuation of $5.50, based on an EV/Sales ratio of approximately 0.25x our fiscal 2008 sales estimates, as we believe valuation levels would improve with overall turnaround of general market conditions.

Salesforce.com Trending Strong

Salesforce.com, Inc. (CRM) is the market leader in the on-demand Customer Relationship Management (CRM) space and continues to see substantial subscriber and customer growth.

While the company reported strong second half results and raised full-year revenue guidance, dilution from the InStranet acquisition will result in lower than expected second half EPS. Although this will penalize the stock, we believe InStranet makes strategic sense, and over the long-term EPS growth will accelerate. We therefore reiterate our Buy rating on Salesforce.com's shares.

We believe a price-to-sales (P/S) multiple is an appropriate valuation metric for Salesforce.com shares given the early stage of the company and its software-centric business. Traditionally, leading software providers trade in a range of 5x to 15x revenue. On our FY 2009 revenue estimate of $1,072.7 million, or $8.93 per share, the stock is trading at a P/S?multiple of 7.3.

We believe the stock can approach a P/S multiple of at least 9x over the long-term as the leader in the space. We set a price target of $83.00, representing a P/S multiple of 9.3 with our 2009 revenue estimate, which we believe Salesforce.com can reach over the next six months.

Although profit margins are currently very low for Salesforce.com, Return on Equity (ROE) is trending in the right direction.