Hold Reuters Ahead of Merger
Reuters Group (RTRSY) reported solid revenue growth during the fourth quarter, despite the slowdown in growth in its Sales & Trading Group, which suffered from the turmoil in the financial markets. Revenues and earnings were below our estimates, though.
Revenues from all three other segments grew at an accelerated rate, and more importantly, regulatory clearances were obtained from E.C. for the merger between Reuters and Thomson Corp. (TOC) on February 29th, 2008, which means that the deal could be completed by the end of the second quarter of 2008.
We have fixed our six-month target price at $73.50 a share on RTRSY because of the current bearish sentiment in world markets, although the stock should sell at around the offer price as the merger approaches completion in 2Q08.
We are maintaining our Hold rating at this time as we feel that the upside to the stock should be limited until the merger is completed sometime in the second quarter of 2008. Finally, we are lowering our estimates due to the weaker 4Q revenues and our new currency expectation of the US Dollar trading at $2.05 per £1 and the latest round of Fed rate cuts, the effects of which would be felt in 2008.
eBay Positives Accounted For
eBay (EBAY) reported better-than-expected results for the first quarter. The company also increased its guidance for full-year 2008. We note the upside was due, in part, to foreign exchange gains, a lower tax rate, and a 37 million share repurchase. While the company should continue to produce solid growth thanks to the strength of its business model PayPal -- along with international opportunities -- these positives are already reflected in EBAY shares.
What's more, we are concerned with slowing consumer spending, increasing competition and the potential for its profit margins to contract further. That said, the stock trades at a reasonable valuation of 18x to 19x our 2008 EPS estimate. As a result, we maintain our Hold rating and expect EBAY shares to perform in line with the overall market this year.
For the quarter, the company had revenue of $2.19 billion, up $424 million from the same period last year. Revenue growth was driven primarily by Marketplaces net transaction revenues, the ongoing expansion at PayPal, Skype and the company's global classifieds business. The company's global footprint helped it benefit from strength in other currencies, relative to the U.S. dollar.
Target $132 on IBM Shares
With over half its revenue (58%) coming from outside the United States, IBM Corporation (IBM) is more insulated from the slower U.S. economy than many of its peers. Moreover, IBM's focus on faster growing markets through a series of acquisitions and divestiture of mature businesses give the company a positive growth outlook.
Given strong performance in the first quarter of 2008, an improved outlook for the full year and continued product releases by the company, we raise our target price to $132.00 and maintain our Buy rating on IBM shares.
Shares of IBM are currently trading at 14.2x our raised 2008 earnings per share estimate of $8.50, which represents a significant discount to the industry and on par with the S&P 500. Given the size and diversified businesses of IBM, we expect that the shares will always trade at a discount to the industry, which includes a number of less profitable but rapidly growing companies. We believe that IBM is a defensive play in the current environment, as the company derives nearly 58% of its revenue from international sales.
Further, we are encouraged with IBM's focus on more profitable businesses, such as software and services, and exit of low-margin businesses. IBM has strengthened its position through strategic investments and acquisitions in emerging higher value segments like SOA, Information on Demand, business process services and open modular systems.
