Hold-Rated Napster Target $3
Napster (NAPS) reported Q3 revenues of $32.8 million, in line with our estimate of $33 million. Revenues grew 15.5% y/y and 3.8% q/q. GAAP net loss narrowed to $0.06 per share and was better than our estimate of a loss of $0.12 per share as well as the company's guidance. The salient feature of this quarter's results was positive cash flow ($1 million +) generated for three consecutive quarters, indicating that management is exercising judicious cash management.
Napster is taking initiatives to improve its subscriber economics, and has made progress in diversifying its service offering. The company expects to launch MP3 (DRM-free) dowloading in Q1:FY09, and anticipates more handsets at AT&T will be compatible with its OTA music store. We expect modestly negative EBITDA over the next few quarters before growth from new initiatives has the potential to gain traction.
The guidance provided by management for Q4 was not very encouraging as revenues are expected to be relatively flat compared to Q3 while gross margin is estimated to decline. For fiscal 2008, revenues are expected to exceed $125 million. It also forecasts that the company will see positive cash flow for fiscal 2008. We maintain our Hold rating and have reduced our target price to $3.00
Manulife at a Fair Price
Fourth quarter '07 results for Manulife Financial Corporation (MFC) came in slightly ahead of our expectations. In-force business growth, higher fee income from larger funds under management, and strong investment performance were partially offset by the impact of declining interest rates and the unfavorable impact of equity markets on its segregated fund guarantee reserves. Despite intensifying competition.
Manulife continues to generate strong growth in its business by expansion of its products and by international franchise. As a result, we would anticipate strong sales and earnings growth trends, strong capital position, and diverse operating platforms to benefit the company, going forward.
Based on 4Q07 results, we are maintaining our FY08 earnings expectation at $3.10 per share and are installing our early FY09 earnings expectation at $3.50 per share. Manulife currently trades at 11.6x our 2008 earnings estimate and 2.25x its 4Q07 book value of $16.11 per share, both of which are at substantial premiums to the industry median multiples.
Considering Manulife's diversified business mix, leading position in most of its markets, strong business growth, improvement to its expense position, expansion of products and locales, and superior profitability relative to its peers, we think the current steep valuation is relatively justifiable. Even though we believe better-than peer earnings growth will result in additional upside in the stock, given the current valuation level, we are maintaining our Hold rating on the shares of Manulife.
Downgrading CRA International
We maintain our Hold rating on shares of CRA International (CRAI) following the release of first quarter financial results. The company is in the process of undertaking restructuring activities to better align its workforce to reflect the current operating environment.
