Buyout Offer Key for Corel Shares

After approximately a three-year stint as a privately held company, Corel Corporation (CREL) has emerged as a much stronger and more profitable entity. With the 2007 integration of InterVideo and Ulead complete, CREL is leveraging new products across its sales and distribution network.

Although the stock is inexpensive, acquisitions add a degree of risk and further acquisitions are unlikely, given its low equity valuation and high level of debt. CREL has hired Genuity Capital to advise it on a proposal by Vector Capital to buy its remaining outstanding shares for $11, which we don't expect it to take. We maintain a Hold rating on the shares with a six-month price target of $11.50.

Corel has several trends working in its favor. The rapid decline in the cost of PCs means increased purchase per household, which should benefit its original equipment manufacturer (OEM) business. The cost of the packaged software is becoming a larger component of the total cost of PC ownership, which could favor lower-cost software. Corel's second quarter results were in line with the company's guidance.

Corel is pursuing a strategy of acquiring other successful packaged-software companies that it can leverage across its global sales, marketing and distribution platform. All of its acquisitions have been of companies with annual revenue of over $25 million and have had a positive contribution to its EBITDA.

In March, Corel received a buyout bid from Vector Capital's affiliate Corel Holdings, L.P., which plans to take the company private. The company is currently evaluating Vector Capital's offer, which will keep the stock price at current levels. Although current market conditions have been challenging, we believe the stock should be fairly stable given its low valuation and modest positive outlook.

United Natural Foods' Nice Price

United Natural Foods Inc. (UNFI) continues to experience broad-based revenue growth and stable-to-improving operating margins ex one-time items. Benefiting from the positive trends in the natural foods industry and improved distribution capacity, the company is expected to continue to grow in terms of sales. The near-term earnings dilution from the Millbrook acquisition has created a valuation-based buying opportunity.

United Natural Foods possesses significant growth potential as the leading domestic distributor of natural and organic products in the growing natural products sector. Key relationships with leading natural product retailers strengthen the company's competitive position. Investments in people, facilities, equipment, and new technologies are also enhancing its competitive position. United Natural Foods is well positioned to deliver consistent double-digit top line growth in fiscal 2008.

United Natural Foods stock has traded in a wide P/E (Price-Earnings Ratio) multiple range of 15 to 38 over the last five years, except in times of earning disappointments. During times of earnings instability, the stock has been supported at the 0.15 level on a price-to-sales basis, which currently equates to $11.78 per share.