VRSN Warrants Some Skepticism
Verisign, Inc. (VRSN) reported $303 million in revenues during Q2, up 17.1% y/y but down 14.4% q/q. Revenues from core business (Domain Names, SSL Certificates, and Identity and Authentication Services (IAS), came in at $233 million. GAAP EPS came in at ($0.35) for the quarter. Pro-forma EPS of $0.25 exceeded our estimate by $0.03.
Core business generated a non-GAAP operating margin of 34.2%, up from 30.3% registered in Q1 2008. Growth in the naming business slowed down. The management provided Q3 revenue guidance of $236-241 million. They remain confident of exiting 2008 with an operating margin of 35%.
VeriSign is trading at 31.7 times our reduced 2008 earnings estimate of $0.98 per share. As the Internet spreads to mobile devices, we see VeriSign tapping this growth market with an array of value-added services. Moreover, we believe the company has substantial growth opportunities in the areas of intelligent supply chains, real-time publishing, and interactive television. However, we are skeptical that the company, given its assertion that it will divest its remaining non-core businesses by year-end, will be able to follow through.
We maintain our Hold recommendation with a reduced target price of $35. This is derived by applying a target P/E multiple of 34.7x to our 2008 EPS estimate, which we think is justified given the company's current consolidation process.
Commerce Bancshares Pricey
Commerce Bancshares, Inc.'s (CBSH) diluted operating earnings (excluding the gain on sale of a branch in southeastern Kansas) of $0.71 per share were in-line with our estimates, but two pennies ahead of consensus. Earnings were driven by expansion in net interest margin and strong growth in non-interest revenue, while expenses remained under control.
Non-performing assets were somewhat stable but charge-offs increased during the quarter. After reviewing the results and based on credit concerns, we are moderating our FY08 and FY09 estimates but maintaining our Hold recommendation on the shares of CBSH with a six-month target price of $47.50 per share.
CBSH has significant excess capital -- 8.66% tangible equity at June 30. We see significant value in this excess capital as reflected by our valuation methodology. Repurchases have been significant, reducing outstanding shares by about 0.5% to 1% quarterly over the last five years, adding greatly to EPS and supporting the stock price in the market.
A focus on fee income is another key investment point. CBSH has also been delivering increasing dividends for the past 40 consecutive years. During 1Q08, the company increased its quarterly dividend by 5% sequentially to $0.25 per share and maintained the same dividend payout in 2Q08. Currently the company generates an above-average dividend yield of 2.40%.
However, valuation remains a matter of great concern now. Relative pricing continues to look very expensive on a P/E-to-growth (PEG) basis. Currently, the PEG ratio for the company is at a 26% premium to the median for the peer group. On a price-to-book basis as well, CBSH is trading at a 48% premium which looks stretched, given a return-on-equity (ROE) only 13% above median.
Cyclacel Pharma in Early Cycle
Cyclacel Pharmaceuticals, Inc.?s (CYCC) lead pipeline candidate, CYC202, is being developed for the treatment of non-small-cell lung cancer. However, CYC202, as well as other pipeline candidates, are still in early to mid-stage clinical development process and several years away from commercialization. As such, we maintain a Hold rating on the stock.
The company bolstered its oncology/hematology program with the acquisition of Align in October 2007. The acquisition provides Cyclacel with three marketed drugs and a revenue stream. Although we believe the development of CYC202 presents a significant commercial opportunity for the company, it is still several years away from reaching the market.
Upcoming catalysts in the coming months include the announcement of clinical results from the phase II study of sapacitabine in cutaneous T-cell lymphoma and the phase IIb APPRAISE trial for CYC202 (seliciclib). Positive data from one or more of these trials could provide a boost to the company s shares and enable the company to strike an attractive development agreement with a major pharma company for one or more of its clinical candidates.
