Sell-Rated Hewitt Target $40
While Hewitt Associates (HEW) is the clear leader in the emerging human resources BPO (business process outsourcing) market, and management has been successful in implementing a plan to improve the company's operating margin, the slower economy should hamper future prospects of employment-related companies such as Hewitt Associates.
The stock appears fairly valued; therefore, the Sell rating is maintained. Despite management raising EPS guidance for fiscal 2008 based on the company's strong performance in the first half of the fiscal year, free cash flow (cash flow from operations less capital expenditures and capitalized software costs) was negative $19.3 million in the first half.
Hewitt Associates is currently selling at 20.6 times trailing 12 month EPS. Over the last few years, the stock has traded in a wide P/E range of 16 to 26, with the stock exceeding 26 P/E to reach a 29 P/E only in the last quarter of calendar 2007. The target price is $40.00, which is a 20 P/E multiple on trailing 12 month EPS.
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