Wait Before Converging on Convergys

Convergys Corporation (CVG), a leading provider of outsourced customer & employee care, announced better than expected earnings results for the fourth quarter of 2007. Although quarterly revenue continues to be lumpy, ongoing restructuring activities have streamlined operating costs which, in turn, improved net earnings. The customer management segment, largest revenue generating element for the company, returned to its historical high-end growth level.

Over the past three quarters, the company has won approximately $1 billion worth of contracts across different geographical regions. Management also reaffirmed its previous fiscal 2008 financial guidance. We believe the business prospects remain firm as the company received two significant contracts that are expected to add revenue in 2009 and beyond.

We maintain the same valuation target for Convergys in anticipation of further business volatility due to potential economic and business softness in the United States and related currency impacts associated with foreign sales. Convergys is trading at 12x our 2008 earnings estimate. This represents a discount to the P/E ratio for the S&P 500 and in-line with the industry group metric.

With respect to other selected valuation metrics, the stock is trading at a significant discount to its peers. Given the large HR BPO contracts received by the company, its ongoing restructuring activities and acceleration of its customer care pipeline, we believe, the current valuation of Convergys does not adequately reflect its true growth potential. We maintain our Hold recommendation as well as our six-month target price of $21 based on a price/sales multiple of 0.95x our fiscal 2008 sales estimates.

Putting Linktone on Hold for Now

Two companies have stated intentions to purchase a stake in Linktone, Ltd. (LTON)  at a premium within three days, which drove up its stock price. Overall, we think the current price fairly represents the company's short-term prospects.

Linktone announced that Indonesian media company PT Media Nusantara will buy its shares with a combination of a tender offer for 6 million existing ADS, representing 60 million ordinary shares, and a subscription for between 180 million and 252 million ordinary shares. The tender offer accounts for 25 per cent of Linktone's outstanding shares.

 With the subscription, the total amount of shares would account for between 51 per cent and 57 per cent of Linktone's outstanding stock. Media Nusantara has agreed to pay $3.80 per ADS, which is a 53.8 percent premium over Linktone's November 27 closing price of $2.47.

The Chinese wireless value-added services market has seen increasingly intense competition.