The company's shares are presently trading at roughly 18.2x our fiscal year 2008 EPADS estimate of $2.02 and at 15.8x our FY09 EPADS estimate of $2.33. While our FY2008 estimates call for year-over-year revenue and earnings growth of 35.1% and 34.5%, respectively, we believe the company is on target with large-scale and longer-duration BPO deals even as competition intensifies for larger deals and growth on a larger scale becomes more difficult. Also of concern is that there will be a supply problem in hiring new and experienced consultants as more and more businesses move into India, and there are only so many skilled workers to hire. The higher attrition rates, coupled with moderate growth, have us concerned about the remainder of 2008, although the company continues to manage its bottom line well. However, our 2009 estimates call for a slower earnings growth of 15.3% over 2008 estimates.
We continue to believe that INFY may trade at a lower P/E than its historical average and have set a price target of $39.25, or between 16.7x and 16.9x our 2009 estimate over the next six months. We continue to rate INFY a Hold and are concerned about the short-term pressures the company is facing.
Calling U.S. Cellular a Hold
U.S. Cellular (USM) is the sixth largest wireless telecom operator in the U.S. and the largest subsidiary of Telephone and Data Systems (TDS). Although competition has intensified following recent consolidation in the wireless industry, U.S. Cellular's high service standards have helped it maintain steady growth of subscribers and keep churn (customer switching) rates low.
Over the previous year, the company demonstrated its ability improve customer retention and increase operating return per subscriber. We maintain our Hold rating while providing a premium to its current valuation as we assess subscriber retention trends and sustainability of ARPU [average revenue per user] levels moving forward.
U.S. Cellular trades at 16.8x our 2008 EPS estimate, which represents a premium to the forward P/E ratio for the industry group (other select domestic wireless carriers). We believe the high P/E ratio reflects the investors belief that U.S. Cellular is still in the early stages of a growth cycle. On the basis of Enterprise Value (EV) to EBITDA (a common valuation metric for wireless carriers), the stock is trading at 5.3x estimated 2008 EBITDA which is at a discount to the industry average.
While the company has respectable long-term growth prospects, the stock has historically traded at a discount to the wireless group partly based on technical factors, such as a smaller number of publicly traded shares and the low average daily volume. However, management issued a positive outlook for 2008. We set a six-month price target of $63.00 based on P/E multiple of 18.5x the 2008 EPS.
