Despite the solid performance, we remain cautious in light of the magnitude of the first-quarter shortfall, as well as the difficulties in executing its business plan in recent quarters. The seemingly quick turnaround in the second quarter likely went a long way towards moving the company in the right direction.
The company's growth via acquisition has led to the expansion of new geographic and the introduction of new practice areas. However, this growth has also created additional challenges, and the company has recently struggled with its attempts to maximize the efficiency of its workforce.
The company is in the process of undertaking restructuring activities to better align its workforce to reflect the current operating environment. These efforts paid dividends that were reflected in the second-quarter results, and we could become more positive on the shares should this trend continue.
Using a P/E ratio, the shares of CRA International are currently trading at a discount to the peer group average and will continue to do so, until the company is able to deliver signs that the improvement in utilization rates is actually sustainable. Our price target of $38.50 reflects a multiple of 15.5x our 2008 earnings estimate.
Results for Ferrellgas Not Feral
Earlier today, Ferrellgas Partners, L.P. ( FGP) reported weaker-than-expected fiscal third-quarter 2008 results, primarily reflecting margin pressures and reduced unit sales due to customer conservation in response to the steep rise in propane costs, somewhat offset by higher fee income and ongoing cost control initiatives.
As expected, the partnership kept its quarterly cash distribution unchanged at $0.50 per unit. Ferrellgas' earnings of $34.8 million or $0.55 per unit (our estimate was $0.63 per unit), compared to $41.8 million or $0.66 per unit in the year-earlier period. Our new fiscal year 2008 EPU estimate is $0.55, down from $0.63 before.
We have kept our fiscal 2009 EPU estimate at $0.74. Quarterly revenue rose more than 14% year-over-year to $712 million, reflecting higher wholesale propane commodity prices and additional fee income, however gross profit was down 7.4% to $195 million. Our Hold recommendation and price objective remain unchanged, as we continue to believe that current valuation adequately reflects the partnership's lack of distribution-growth prospects, margin pressures, and a relatively weak balance sheet.
Soapstone Continues to Slip
After several large carriers announced that they were not interested in using Soapstone Networks Inc's (SOAP) Provider Network Controller (PNC) technology, the stock price has fallen below cash levels. Although cash should continue to be a cushion for the stock, we expect the company to burn cash for the foreseeable future as the PNC ramp could be slower than expected and competition is likely to increase. As such, we maintain a Sell rating on the shares.
Competition in the PNC market looks poised to increase from other companies focused on carrier Ethernet, such as Gridpoint Systems and Ciena Corp. (CIEN). Although there is a need for a multi-vendor product, such as the one Soapstone hopes to develop, the market is still unproven. We believe this is a risky proposition with success far from certain.
With core router shipments complete, Soapstone has stopped generating cash until the software business can provide enough revenue to cover expenses. Assuming Soapstone is successful, we believe it could still take four to five years in order to generate positive cash flow. In the meantime, Soapstone will be investing heavily in development and burning through its cash balance.
Without meaningful current revenues and limited visibility into future revenue, our price target on SOAP is based on the company's cash balance. We estimate that Soapstone will have approximately $6 per share in cash in six months, the horizon of our target price. As the stock will still be burning cash and the value of its PNC business is unknown, it looks likely that the shares will trade below cash value absent any positive customer developments. We therefore set a price target of $4, below its estimated cash balance.
