Ultimate Software Ultimately a Hold
The Ultimate Software Group, Inc. (ULTI) is growing at a double-digit rate and appears to be gaining acceptance in large organizations with more than 2,500 employees. Over the long-term, the company expects to achieve its target operating margin of 30%, up from a single-digit rate. Although we do believe ULTI is well positioned, recent data points indicate that the employment market is slowing, which will likely have a negative impact on ULTI's business.
We believe Ultimate Software is well-positioned to take advantage of growth in on-demand payroll systems and the company has been executing its strategy well. The company is profitable and growing at a double digit rate. Ultimate Software appears to have strong growth prospects, however, it is difficult for us to warrant a Buy recommendation when the company is already trading at 60.2x our 2008 earnings estimate in the face of a slowing employment market.
Of further concern, ULTI lowered its 2008 EPS estimate as a result of lower interest income and a higher tax rate, along with higher operating expenditure from increased investments in product development. We, therefore, maintain a Hold rating on ULTI shares and set our six-month price target to $31.50. This represents a P/E multiple of 63x our 2008 earnings estimate of $0.50 per share, and a P/S multiple of 4.2x our 2008 revenue estimate of $7.56 per share, still well above the industry median, but reflective of ULTI's strong position.
Optimistic Guidance for Fred's
On March 27, Fred's, Inc. (FRED) reported another weak quarter. Excluding $0.25 per share in charges related to restructuring and store closings, Fred's had earnings of $0.14 per share. This was slightly below our estimate of $0.15 and 39% below the fourth quarter of 2006.
In light of its weak results, management's guidance for 2008 looks quite optimistic. Fred's expects to open 18 stores and 15 pharmacies in 2008 and close 75 underperforming stores and 22 pharmacies during the coming year. In 2007, the stores and pharmacies slated for closure had aggregate sales of $112 million and an aggregate operating loss of approximately $9 million.
Looking ahead, the company expects total earnings per diluted share for 2008 to be in the range of $0.52 to $0.58 including costs in 2008 related to the announced store closings. Excluding these one-time charges of $10.8 million, but including the $5.2 million impact of the minimum wage increase, earnings per share for 2008 are forecasted to be in the range of $0.70 to $0.76.
For the first quarter of 2008, Fred's expects earnings per diluted share to be in the range of $0.15 to $0.18. Comparable store sales for the first quarter are expected to increase in the range of 1% to 3%.
Prior to its earnings report, consensus was $0.62 and we were at $0.61. While Fred's store closing plan should help boost its profit margins, it will still be difficult for the company to overcome the headwinds negatively impacting its core customer. We maintain our Hold rating and $10 target price. FRED shares trade at 13.9x our fiscal year 2008 EPS estimate and 11.9x our fiscal 2009 EPS estimate.
Fred's P/E ratio is in-line with its peers and its long-term earnings growth rate. We think the stock looks fairly valued at current levels. Our target price is $10, which assumes the stock will track the overall market for six months.
Jupitermedia Target Lowered
Jupitermedia Corporation (JUPM) recently issued Q1 revenue guidance of $35-$36 million, while EPS is anticipated to be $0.01 per diluted share. Though JUPM's acquisitions have been the primary driver for its revenue growth, its debt level has also increased proportionately.
The company believes the current macro environment has negatively impacted some RFP activity in its media business but its images segment has not been affected as yet. JUPM is expected to restate its FY2006 and Q1:07 numbers in its 10-K, expected no later than 4/1/08.
