Cox Radio Sees Margins Squeezed
Shares of Cox Radio, Inc. (CXR) have fallen after the tightening credit markets dashed speculation that its parent company, Cox Enterprises (CEI) will purchase the remaining 33% of CXR's outstanding shares, which it does not already own in a leveraged buyout. The transaction would be attractive for CEI, given its low leverage, and high ownership stake.
However, while inevitable in the long-term, we think a buyout is unlikely even if the credit markets ease in 2H08 because CEI's stake value is implicitly growing as Cox Radio continues its own buyback, and it also holds 95% of the company's voting power. Meanwhile, CXR's ad revenue and EBITDA growth are being squeezed by secular industry pressures, as the Internet and local media options, like cable television, take away share from radio.
On January 16, 2008, Cox Radio announced that it has exercised its option to acquire five radio stations serving the Athens, Georgia, market for $60 million, less $12 million earlier paid toward the option. The company expects the transaction to close in 2Q08. At the end of the transaction, Cox Radio will own and operate 85 stations clustered in 19 markets. Considering all aspects, we would like rate the shares of Cox Radio as Hold with a six-month target price of $13.
Sumit Singh contributed to this report.
Growth & Costs Balance for POSCO
POSCO (PKX) is well positioned to achieve long-term growth as the company is rapidly shifting production to higher-margin products and undertaking investments to secure low-cost raw material supply. Moreover, the company's new FINEX technology will provide meaningful cost-savings over the long term.
However, the company's margins may suffer from high energy and raw material costs like iron ore and scrap. Also, concerns about an economic slowdown cast a shadow on the future steel price outlook, and sale of the stainless steel business is suffering from lower nickel prices (its principal raw material) which led to stainless steel production and price cuts undertaken by global steel producers. Currently, the stock is trading at 11.2x our 2008 earnings estimate of $12.21 per ADR.
The long-term fundamental backdrop remains positive. POSCO has a tremendous opportunity to leverage on its low-cost leadership in the Chinese market. The company seeks growth through expansion of its stainless steel facilities and its cost-saving efforts. We have valued POSCO using a price/earnings (P/E) model and an industry comparison. We retain our Hold recommendation on the stock, with a target price of $137 per ADR.
Hold-Rated Concur at Lofty Levels
Concur Technologies, Inc. (CNQR) reported results for its first quarter of 2008 that exceeded our revenue estimates and fell slightly short of earnings estimates. There was very strong growth in higher-margined subscription revenues in the quarter. The company advanced the launch of Concur Pay by six months, and integration of Gelco is proceeding ahead of schedule.
Geographical expansion in Europe should also help to increase its visibility among customers. We have raised our 2008 revenue projection to reflect an anticipated 58% year-over-year growth rate, but have lowered our earnings estimate based on company guidance.
We are encouraged to see that the management is following a mix of both organic and inorganic expansion of the company. The sharp increase in number of customers added in the most recent quarter is expected to give a nice boost to the monthly, recurring higher-margined subscription revenues. The guidance, however, leads us to lower-than-expected gross and operating margins for 2008, which is our primary reason for lowering EPS estimates for FY08 from our earlier estimates.
