Wisely Stay on PLATO Sidelines
We maintain Hold rating on the shares of PLATO Learning, Inc. (TUTR). Though the company's cost-cutting initiatives and new product pipeline are encouraging, the transition from a licensed-based to a subscription-based model for its products and services is resulting in significant margin erosion.
Also, local government budget constraints and deficits are expected to continue, which will negatively impact the availability of public school funding and, hence, the demand for the company's products and services. However, a pipeline of new products was launched in fiscal 2007, which should temper the sales decline and growth should be reinvigorated upon the complete transition to the subscription-based model.
Due to the company's reported net loss for the last six fiscal years along with questionable growth prospects, the stock is better valued on a Price-to-Sales (P/S) basis. PLATO's stock has traded in a wide P/S multiple range of 0.8 to 4.0 over the last five years. Currently, the stock is trading at a P/S multiple of 0.87, a discount compared to the company's closest competitors and the lower-end of historical average five-year range.
We expect the stock's valuation to remain at the low-end of the valuation range, since there has not been any near-term catalyst to generate revenue and earnings growth. The target price of $3.00 is 1.0 times trailing 12-month sales (revenues).
Europe Issues Affect Akzo Nobel
Akzo Nobel N.V. (AKZOY) is enhancing its global position in coatings through acquisitions and internal growth. Recently, the company underwent a major transformation with the sale of its Organon pharma business to Germany-based pharmaceutical company Schering-Plough Corp. (SGP) and acquisition of UK-based largest chemical producer Imperial Chemical Industries PLC.
However, rising commodity costs are negatively affecting margins. The company is also facing a difficult environment in Europe. This leads us to rate the stock a Hold with a six-month target price of $73.00.
Recently, the Eka Chemicals business announced its plan to acquire Levasil, the silica sol business of Germany's H.C. Starck Group. Akzo Nobel's chemical businesses are aggressively pursuing the strategy of expanding into emerging markets of Asia, especially in China and Brazil. The company has set a revenue target of $2 billion by 2012 for China. The company formed a 50:50 joint venture with Feixiang Chemicals to manufacture and market surfactant products. Akzo launched $1.37 billion of its balance $4.1 billion buyback program in March.
Going forward, sluggish global demand for the paint industry is likely to erode margins for Akzo Nobel.
