Conservative Marchex Outlook
As a consolidator of local Internet advertising, Marchex, Inc. (MCHX) is executing on its strategy, positioning itself to accelerate top-line growth through new product integration and leverage its operating model to increased profitability. However, economic concerns give us a more cautious outlook on Internet advertising during 2008, and growth in MCHX's proprietary traffic will likely slow as it reduces dependence on third-party monetization sources.
We, therefore, maintain a Hold rating on MCHX. Marchex is poised to benefit from increased spending on paid search as the company differentiates itself from other search providers with focus on local advertisers. The company continually improves its operating leverage through increased investment in new products. However, higher operating expenses and rising acquisition costs are eating up the income available to shareholders and its competitive environment is intensifying.
Marchex is currently trading at 2.9x our 2008 revenue estimate of $3.70 per share, a discount to the industry mean. Given a conservative outlook for 2008 with a slowdown in the U.S. economy, we set a six-month price target of $11.50, reflecting a P/S multiple of 3.1x our 2008 revenue per share estimate of $3.70, a discount to S&P 500. We believe the stock can reach this given the valuation range of its peer group.
China Telecom Near Fair Price
China Telecom Corporation, Ltd. (CHA) announced mediocre results for 2007, compared with other Chinese mobile operators. However, China Telecom is the market leader in fixed-line phone services in one of the world's fastest growing telecom markets.
On March 31, 2008, China Telecom announced its financial results for 2007. Its revenue was RMB 175.36 billion, up 2.8% over 2006. Its net profit for 2007 was RMB22.52 billion, up 1.1% over 2006. EPS for 2007 was RMB 0.278 ($3.81 per ADS), compared with RMB 0.275 for 2006.
At the end of December 2007, China Telecom had 220 million subscribers, down 1.2% from a year earlier. Broadband Internet subscribers were up 26% to 35.65 million. Its attractive long-term prospects arise from growth in broadband, value-added services and potential 3G services. Although the number of its fixed-line users declined in the second half of 2007 due to competition from Chinese mobile operators, its revenue increased due to the expansion of its broadband business and value-added services.
Thus, we maintain our Hold rating on the stock. Based on our estimate for fiscal year 2008 earnings per ADR, the stock is trading at 16.2x, which is below the industry average. Based on our estimate for fiscal year 2009 earnings per ADR, the stock is trading at 15.6x, which is also below the industry average.
