Under the deal, CACI is now qualified to compete for individual government information technology projects, which could include writing computer software and building computer networks. Finally, although there is an uncertainty related to funding in the short term, we think the trend toward outsourcing by the federal government to modernize mission-critical information systems remains intact.
Moderating Schwab Estimates
Charles Schwab Corporation's (SCHW) first-quarter diluted earnings from continuing operations of $0.26 per share were in-line with our estimate as well as the consensus. Though fundamentals remain strong and capital restructuring provides a positive signal, the valuation based on P/E and P/B currently looks very expensive.
Further, we suspect lower client activity resulting from a weakening economy and margin compression due to lower interest rates, during the coming quarters. Hence, our rating remains unchanged at Hold.
We also expect SCHW to grow its market share in the coming quarters as a result of ongoing problems with some of the discount brokers. SCHW remains focused on improving its margins and return on equity.
SCHW currently trades at 19.4 times the consensus forward estimate, a 35% premium to the peer group median. We think that SCHW deserves to trade at a premium over its peers, based on its excellent asset growth, stable revenue stream, sound credit rating, and steadily expanding margins.
We are moderating our FY08 and FY09 earnings estimates to $1.09 per share and $1.29 per share respectively. Our $23.00 price target equates to 21.1 times our EPS estimate for FY08. We view the $0.20 per share annual dividend as secure, implying a 6.5% expected total return over the period.
Let Peet's Coffee Percolate
Peets Coffee & Tea, Inc. (PEET) is a growth company in the premium coffee and tea industry. Management is implementing a growth strategy based on product quality and expansion through multiple channels of distribution.
The company has exhibited consistent revenue growth since 2002; hence, the stock trades at a premium P/E. However, after reporting in-line EPS for the first quarter of 2008, management now expects EPS to be at the lower end of the prior guidance range. The Hold rating is retained.
The specialty coffee market is highly competitive and fragmented. Many of its competitors have greater financial, marketing and operating resources than Peet's Coffee & Tea. Coffee prices have increased significantly since 2005 and with the growth of the specialty coffee industry, the company could experience significantly increased costs.
A significant percentage of the company's revenue is generated in California. A regional housing crisis and recession, a decrease in consumer spending, or a change in the competitive conditions in California could materially decrease the company's revenue and affect its growth strategy.
Peet's Coffee & Tea is currently selling at 35.6 times trailing 12-month EPS, reflecting the company's higher-than-average revenue growth profile. Revenues have grown at a 20.2% five year compound annual growth rate (CAGR).
Over the last few years, the stock has traded in a P/E range of 30 to 54, though most price action has been contained within the 36 to 47 P/E range. The company's pristine balance sheet, store expansion plans, and continued top and bottom line growth should support the stock's high P/E. The target price is $25.25, which is a 39 P/E multiple on 12 month trailing earnings.
