For Growth in China, See Ctrip.com
Ctrip.com (CTRP) reported strong financial results for the first quarter of 2008 in spite of bad weather, and again exceeded market consensus estimates. Its profit margin continued to improve due to strong revenue growth and increased commission per ticket sold.
Ctrip's results were driven by strong growth in all of its business units. We think Ctrip's past results demonstrate that the company's long-term growth story remains intact under almost all circumstances. Therefore, we maintain our Buy rating on Ctrip.
Based on our estimate for fiscal year 2008, earnings per share, the company is trading at 59.8x, which is similar to the industry average. Based on our EPS estimate for fiscal year 2009, CTRP shares are trading at 40.3x, which is much lower than industry average. Using a P/E multiple of 49.3x our fiscal year 2009 earnings per share estimate yields a target price of $70.00, which we believe reflects the company's solid growth prospects.
Patni Momentum Slowing Down
Patni Computer Systems (PTI) reported in-line revenues but much lower-than-expected earnings in the first quarter of 2008 due to lower gross margin as well as foreign exchange losses. The company benefited from a lower-than-expected effective tax rate in the quarter.
We are maintaining our revenue and earnings estimates for the rest of 2008 and believe that the company has significant execution risks going forward, although it may be helped by a depreciating rupee. Lackluster guidance, margin pressures and possibility of a consumer-driven recession in U.S.A. imply subdued business momentum.
We believe that in the absence of a near-term catalyst, there is not much upside to the stock for the first half of 2008, and continue to rate PTI a Hold. We have set a target price of $14.00 or 10.07x our 2008 earnings estimate of $1.39 per ADR.
Let American Oil & Gas Pay You
We are reiterating our Buy rating on American Oil and Gas (AEZ) shares and increasing our target price from $8.00 to $9.00 per share. Although recent results were on the weaker side, our overall positive view of the AEZ story remains unchanged.
After booking reserves from the three Fetter Field wells it drilled in 2007 as a result of its partnership with Halliburton-backed RTA, we feel that the Fetter Field's risk profile has meaningfully improved. Even with our conservative risked reserve assumptions we feel that AEZ is undervalued at current levels. We see significant reserve and production growth going forward.
We use an NAV [net asset value] calculation to value American Oil & Gas. The company has three unique development opportunities, each with a different return potential. We believe that our NAV calculation conveys the return potential of these prospects and properly discounts for drilling costs, LOE expenses, G&A, and future taxes. In our view, the NAV calculation based on our commodity-price deck is a conservative valuation approach. Contrary to general street practice and the requirements of the SEC PV-10, we use after-tax cash flows in our NAV model.
We believe that stocks should trade at a premium to such conservatively constructed NAV estimates. Our twelve month price objective, however, is only 10% higher than our NAV estimate, reflecting the time-value premium.
