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 ULTIâ?s business.

Moreover, rising operating expenses are hurting profitability. We, therefore, maintain a Hold rating on ULTI shares and set our six-month price target to $34.50. 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. In spite of mounting operating expenses, which are taking a toll on its profitability, the company is growing its revenue 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 109.3x our 2008 earnings estimate in the face of a slowing employment market. This represents a P/E multiple of 46.6x our 2009 earnings estimate of $0.74 per share, and a P/S multiple of 4.5x our 2008 revenue estimate of $7.60 per share, still well above the industry mean and median, but reflective of ULTIâ?s strong position.