However, we still expect that the strengthening Euro will ultimately lead to margin weakness, even as the company continues to cut costs. Thus, we rate STM a Hold.
The restructuring of its manufacturing facilities - through the opening of its Chinese facility as well as the initiation of a partnership with International Business Machines Corp. (IBM) - may enable the company to save on R&D [research and development] spending, which could help alleviate some cost pressures. Additionally, the sale of its Flash Memory Unit, which is now completed, might also help improve margins.
Shares of STMicroelectronics are trading at a level where they are fairly valued in relation to its peers, in our opinion. We feel STM should trade between 13.8x to 14.0x our adjusted 2008 estimates until we have more visibility into 2008 after the finalization of the divestiture of the flash memory segment and the restructuring of its manufacturing facilities which are expected to be dilutive to earnings in the near term. Therefore, we have fixed our target price at $12.10 over the next six months, as we remain concerned about the short-term outlook of the semiconductor market.
Nortel Networks at a High Premium
Nortel Networks Corporation - ADS (NT) is a leading developer of telecom equipments. We maintain our Hold rating with a higher valuation target for Nortel as we expect a series of customized products designed for IP-based converged networks from the company over the near term.
The company has taken a strategic decision to revamp next-generation (4G) wireless offerings in order to introduce WiMax and LTE solutions faster to the market, in some cases ahead of its competitors. Telecom gear manufacturers are likely to be challenged by tightened capital budget of carriers due to ongoing recessionary conditions in the global economy. It was necessary for management to appropriately plan its product roadmap to focus more on growth markets.
We believe this new business strategy will solidify Nortel's position in the wireless equipment market. Furthermore, the company received a major contract for its high-speed Metro Ethernet switch from Verizon (VZ).
Nortel is currently trading at 61.3x our fiscal 2008 earnings estimates. This represents a significant premium to both the forward S&P 500 average and the peer group average. In the near-term, we believe the stock price will remain volatile with the possibility of an economic recession in the U.S adding to the near-term risk factors. Therefore, we set a six-month valuation target of $12, which is based on a Price/Sales ratio of 0.53x our fiscal 2008 sales estimates.
Valuation High for DeVry
DeVry, Inc. (DV) continues to execute well, with the company reporting positive enrollment trends since its turnaround in fiscal 2006. The ongoing real estate optimization strategy and incremental acquisitions are adding to the company's earnings potential. Due to the stock's high P/E, however, the Hold rating is maintained.
Competitive pressures for DeVry University are increasing from community colleges, traditional universities and technical colleges that offer industry-specific certification programs, particularly in the computer information field. These short-term certificate programs offer a pathway to the job market for students.
