Though the quality of this portfolio is significantly better than NAL's peers, we anticipate continuous stress on the portfolio in the coming quarters as the housing markets are expected to remain under significant pressure. NAL is subject to strong competition from both well-established and smaller local players.
NAL currently trades at 21.7 times the consensus forward estimate, a 77% premium to the peer group median. On a price-to-book basis, the shares trade at a 21% discount to the peer median. Our six-month target price of $13.00 per share equates roughly to 0.98 times our projected book value of $13.25 per share at September 30, 2008, or 23.6 times our 2008 EPS estimate. With $0.28 per share annual dividend, this target price implies a 5.1% expected total return over the same period.
Omnicom Pressured by Ad Firms
Omnicom Group (OMC), the holding company for a group of independent advertising and communication services firms, continues to generate solid organic revenue growth and new business wins. In addition, management continues to acquire complementary companies that either serve or have the ability to serve the existing client base through the extension of the company's platform of services.
However, the company's significant international operations add volatility to top-line growth. The Hold rating is maintained for the shares.
The company has deep client penetration, an excellent management team, top-tier agency brands, and offers a significantly better organic growth profile relative to its peer group. Amid signs of an improving advertising environment, Omnicom is uniquely positioned to benefit from a shift in client brand strategies towards global advertising and marketing from local, regional and national markets.
Given the intense competitive advertising environment, pricing pressures continue to negatively impact operating margins. This will be further exacerbated by an unfavorable shift in product mix. In addition, a weakening economy can dramatically lower the level of advertising spending. Meanwhile, a tighter labor market in the U.S. should continue to lead to higher recruitment, salary, incentive compensation, and other employee-related costs as a percentage of overall revenue.
Shares of Omnicom Group are currently trading at a Price-to-Cash Flow multiple of 12.3 times trailing 12-month cash flow. Over the last few years, the stock has traded in a wide Price-to-Cash Flow range of 22 to 7, with the most of the price action within the 20 to 12 range. The target price is $53.50, which is a 14.0 Price-to-Cash Flow multiple on trailing 12 month cash flow.
Nice Entry Point for Oscient Pharma
We believe despite the intense competition in the market, Oscient Pharmaceuticals Corporation's (OSCI) sales force has done a commendable job in driving growth for its two products, cholesterol drug Antara and antibiotic Factive. Upcoming catalysts for the stock could come in the form of announcements regarding the in-licensing of a third product or the signing of a partnership deal for pipeline candidate Ramoplanin (for a serious form of colitis).
We think the introduction of a third product will not only bring in an additional source of revenue for Oscient, but also ensure the optimum utilization of its sales force.
