A Hold on FTI Consulting
We maintain our Hold rating on shares of FTI Consulting (FCN) following the release of solid fourth quarter results. Given that top line growth continues to benefit from strong demand across the company's operating segments, with EBITDA margin remaining relatively stable, we believe that the shares will continue to trade at a premium to the peer group.
For fiscal 2008, management has a strong forecast. Assuming organic revenue growth of 17.5% to 19.5%, management expects revenue to be $1.28 billion to $1.31 billion with EBITDA estimated between $300 million and $310 million. Fully-diluted shares outstanding are expected to be approximately 54 million. Net income is expected between $129 million and $135 million with diluted EPS between $2.40 and $2.50.
Shares of FTI Consulting are trading at 22.7x our 2008 EPS estimate and at a premium to the peer group. Given that top line growth continues to benefit from strong demand across the company's operating segments, with EBITDA margin remaining relatively stable, we believe that the premium to the company's smaller peers is warranted.
The company reported solid Q4 results, with strong growth reported in all the company's segments. We currently believe that the company's solid operations and growth potential are largely reflected in the share price. Our $61 price target implies a multiple of approximately 25x our 2008 earnings estimate.
Sycamore Developments Need Time
We maintain our Hold recommendation and the same valuation target for Sycamore Networks (SCMR), a leading telecom solutions provider for fixed and mobile networks, following the announcement of its second quarter fiscal 2008 earnings result (ended January 26), slightly better than our estimates. Customer demand for intelligent bandwidth management solutions across different broadband network infrastructure contributed to the company's top-line growth.
Sycamore diversified its business opportunities in different segments of the network equipment market through the introduction of high-margin products. In addition, the company has a strong cash position.
However, our major concern is the negative operating margins and our forecast indicates that the company will be unable to achieve sustainable operating profit in fiscal 2008 at current operating levels. We also remain concerned regarding the recent recessionary trend in the U.S. economy that may reduce carrier spending in the near term.
Sycamore is currently trading at 26.4x our fiscal 2008 earnings estimate. This is at a premium to the S&P 500 but at a huge discount to the peer group (optical telecom equipment manufacturers) average. We believe Sycamore's valuation is based on the future revenue potential relating to new network deployments and expectations for near-term improvement in earnings.
The company remains one of the only pure-play optical switching manufacturers in the communications industry. We believe long-term trends for optical access and transport opportunities are improving as video streaming becomes more common among Internet users.
Unfortunately, higher-bandwidth requirements for content delivery may take time to saturate today's available transport capacity. According to our view, revenue is likely to be volatile throughout fiscal 2008, and expenditures are expected to increase due to new product introductions and integration related costs associated with the acquired entity. Our $4.50 price target is based on a forward P/E multiple of 34.6x to our fiscal 2008 earnings estimate, closer to the peer average.
Nalak Das contributed to this report
Revisions Gave Insight on AIG, DELL
Just as earnings estimate revisions can help you make money, they can also alert you about stocks you should avoid. For example, let's look at American International Group (AIG) and Dell (DELL) -- two of the primary reasons the stock market dropped on Friday.
Earnings estimates had falling on AIG for nearly two months, because of worries about bad debt. These worries proved to be correct as AIG had bigger write-downs than were expected. Just a week ago, I wrote in the weekly Earnings Preview column that the insurer could miss.
