Pressures Increase for DRIV

Zacks senior technology analyst Abdul Saleh reiterates his Hold recommendation on shares of Digital River (DRIV), and we though his latest research report would be a good place to find out some of the particulars behind this decision:

'Because of its extensive network of partnerships, the company has collected valuable data on purchasing behavior and is able to offer direct marketing services to a broad array of clients as well. The company's e-commerce solutions are designed to help companies of all sizes maximize online revenues, cut costs and reduce risks associated with running an e-commerce operation.

'Some traditional retailers have developed the expertise to deliver digital and physical goods, to process transactions, to detect fraud and respond to customers round the clock, however. As a consequence, the company's commission rate of roughly 15%-20% per sale is expected to come under pressure. Also, due to the low barriers to entry in this industry, Digital River must continue to distinguish itself from its competitors by anticipating new trends and creating products that satisfy these future needs.

'On the positive side, the company has recently announced a new agreement with Electronic Arts, Inc. (ERTS) where it will sell handhelds, games and consoles at three of EA's core areas. However, we do not expect to see meaningful revenues from this relationship before CY2008.

'Although the company's core business is performing consistently, we also expect to see increased spending in the quarters ahead, especially in infrastructural investments and R&D. This, in turn, is expected to impact EBIT margins in FY2007. Given a flattish earnings guidance for Q3 and a flat expectation for 2007, we have adjusted our target price to $38. The target price is derived by applying a target multiple of 20.0x to our pro forma 2007 estimate, which is higher than the industry median.'

Buy-Rated AIR Target Lowered

Under Zacks small-cap coverage, senior aerospace & defense industry analyst John Nelson Simon has recently updated his Buy report on AAR Corp. (AIR), though he has seen fit to lower its target price.  Here's why:

'AIR provides goods & services to both the commercial airlines and the military services. On the commercial side, demand for AIR's offerings increases as the fleet of aircraft expands as well as ages. Demand also grows as the airlines outsource more maintenance, repair and overhaul work. Additionally, for the defense sector, AIR designs and manufactures much-needed mobility products, aircraft internal cargo loading/unloading systems and composite structures.

'While we maintain our BUY recommendation for AIR, we have adjusted our six-month target price downward - from $40.00 to $36.00 - to reflect declining P/E ratios in the group of similar Aerospace/Defense stocks under coverage.  The average P/E for this group is 15.9 as compared to 13.4 for AIR. Given AIR's May fiscal year, in six months, it quite possibly will be trading based on projected fiscal 2009 earnings. Our projection for AIR for fiscal 2009 is $2.22/share, fully-diluted; using the average P/E of 15.9 would engender a price of just over $36.00, which would indicate that AIR is a BUY at current levels.'

Royal Caribbean Remains a Buy

Zacks senior travel & leisure industry analyst Sean P. Smith still sees good value in the shares of large-cap cruise liner company Royal Caribbean (RCL).  We excerpted the following details from today's Buy report on the company:

'We maintain our Buy rating for Royal Caribbean, primarily due to valuation. The current top-line environment appears to be improving, and we consider RCL to be poised to strongly benefit given an increase in demand. While we expect higher fuel prices going forward to remain challenging, we believe that core operating growth will remain attractive.

'With the shares currently trading at 10.1x our 2008 earnings estimate and at a 20% discount to its largest rival, we consider this to be an attractive entry point.