Fair Value for DST Systems
DST Systems, Inc. (DST) was hit hard in the first quarter by the loss of share owner accounts that were converted to less profitable sub-accounts. We believe this is likely to be a headwind for the foreseeable future as mutual fund companies continue to offload this function to broker dealers. We maintain our Hold rating on DST shares and set our target price to $67.00.
DST's leadership position and scale in Financial Services should help it continue winning new business and converting its pipeline. The Financial Services division has benefited from the increasing popularity of mutual funds.
After repurchasing approximately 5.6 million shares under approved share repurchase programs in the first quarter, the company recently authorized an additional 5.0 million share repurchase to its existing share repurchase plan and currently has 5,039,535 shares remaining to be purchased under the plan.
But DST has shown minimal revenue growth. Although Financial Services had shown consistent growth through a difficult period for the mutual fund industry, we question the company's ability to re-accelerate growth in this business.
Shares of DST Systems are currently trading at a P/E multiple of 16.9x our 2008 earnings estimate of $3.77, a premium to the industry median and S&P. Moreover, we are concerned about stagnant cash flows, rising debt levels, and the maturity of the industry in which the company competes. We therefore set our target price to $67.00. This represents a multiple of 17.8x estimated 2008 EPS, a premium to the industry median. We believe this valuation is a fair valuation for DST shares.
Home Diagnostics' Target Upped
We expect Home Diagnostics, Inc.'s (HDIX) earnings to be back-end loaded during 2008, due to seasonal issues and heavy selling and marketing expenses in the front half of the year. In January, HDIX negotiated a new exclusive co-branding agreement with Rite Aid Corp. (RAD), which should help volumes in the second half of the year.
However, the company doesn't appear to be able to leverage expenses. Customer consolidation also reduces the growth outlook. We expect increased competition from Johnson & Johnson (JNJ) and Medtronic Inc. (MDT) will also likely pressure the top- and bottom-line. Increased consumer awareness will continue to fuel this group over the long-term.
Management guidance for 2008 EPS also reflects an assumed higher tax rate, lapsing of the research and development tax credit, and the tax benefit received in the first quarter. Our EPS estimate remains unchanged.
Given the risk factors, and low growth outlook, we believe the company will finish the year at the top of its guidance range. However, due to competitive factors, the stock should trade at a discount to comparables. At a 20-30% discount to the group average 1.3x 2008 P/E/G, we believe HDIX is fairly valued at $8.50. Our rating on the stock is Hold but our target price increases to $8.50.
Seeing OmniVision as a Hold
OmniVision Technologies, Inc. (OVTI) is a fabless original equipment manufacturer (OEM) of complementary metal oxide semiconductor (CMOS) image sensors and support circuitry used within handsets and applications in other mass markets. The company's fourth quarter revenue fell short of consensus estimates, although the EPS exceeded.
