Slow Economy Felt at Robt. Half
Although the company benefited from double-digit revenue growth in 2007, concerns remain about an economic slowdown negatively impacting staffing companies like Robert Half International (RHI). The operating margin is contracting, primarily due to weak international operations at Protiviti, which embarked on an aggressive global office expansion program at the same time revenues came under pressure from reduced client demand for compliance-related employees. The Hold rating is maintained.
Robert Half is currently trading at 13.1 times trailing 12-month earnings. The company is quite cyclical, with EPS dropping down to $0.01 in 2002, resulting in a 1,800 P/E ratio when the stock was most attractive. Therefore, the stock should be valued on a price-to-sales (net service revenues) basis. Over the last five years, the company's stock has traded in a P/S range of 1.05 to 2.62, with the stock dropping to 0.79 times net service revenues in the last few months.
Although the company has generated strong revenue and earnings growth in 2006 and 2007, a potential cyclical peak for the company's U.S. businesses remains the primary concern. In addition, there is reduced client demand for compliance-related employees; hence, management expects a drop of 15% to 20% in compliance-related fees. Robert Half currently trades at 0.80 times trailing 12-month net service revenues (sales). The target of $27 is based on a 0.90 P/S ratio on 12-month trailing net service revenues.
Scaling Down Everest Re Ests
Everest Re Group, Ltd. (RE) reported 1Q08 results of $3.03 per share, versus $4.13 per share in the year ago quarter. Prior to the conference call, we are lowering our 2008 and 2009 earnings expectations to $12.78 per share and $13.75 per share, respectively from $13 per share and $14 per share. As a result, our six-month price target is now $99.35 per share. Our Hold recommendation on the shares remains in place.
The shares of Everest Re trade at 1.04x its 1Q08 book value of $91.01 per share. RE's valuation has continued to moderate from the 1.5x level exhibited nearly a year-and-a-half ago, as Everest's five-year average ROE remains below the peer group average. Our six-month price target of $99.35 per share, incorporates a blended peer multiple of 1.03x (1.10x previously) to our estimated September 30, 2008 book value of $96.45 per share.
In addition, the quantitative Zacks Rank for Everest Re is currently 3 (no change since our report on November 18, 2007), indicating no clear directional pressure on the shares over the near term, though the short interest ratio moderated to 0.8 days, versus 1.8 days previously.
More Medicines Co. Data Needed
The Medicines Company (MDCO) specializes in acute care hospital cardiology products. It acquires and develops products that are either in the later stages of clinical development or are already on the market. Its lead product is Angiomax, an anticoagulant approved in the U.S. and other countries for use in patients undergoing coronary angioplasty procedures.
We believe that recent positive data from two trials, ACUITY and HORIZON, will help boost Angiomax sales in the coming quarters. Besides this, two late-stage candidates position the company well for the future. We hope to have more clarity on the launch of Cleviprex in 2008.
Data from the ACUITY trial, if added to the label, could help accelerate Angiomax trends in the coming years. We are also impressed with the recently presented HORIZON data and both TCT and ACC. Two late-stage pipeline candidates will deliver the next wave of growth for the company.
