We maintain the same six-month target valuation of $33, based on a net of cash P/E multiple of 24.5x our fiscal 2008 forward earnings estimates, a premium over its peers due to Polycom's dominant position in the video/voice collaborative solutions market, plus net cash balance of $3.80/diluted share.
Delay for ChoicePoint Merger
The proposed merger between ChoicePoint, Inc. (CPS) and Reed Elsevier (REL) has been delayed as the FTC has requested additional information and several state attorney generals are looking into the proposed deal.
ChoicePoint's aggressive acquisition strategy has been largely responsible for what the company is today. These acquisitions have given the company increased scale and cross-selling opportunities across products and vertical markets, which will drive growth.
During 2007, troubles in the sub prime mortgage market have had an extremely negative impact on CPS marketing services business, which posted a 24.8% decline in revenue. We do not expect comparisons to improve in the near future, meaning sluggish revenue growth will continue through 2008.
Although the proposed merger has been delayed, we believe the merger will ultimately be approved. it is expected that the transaction will close later in the year. The acquisition will give shareholders $50 per CPS share in cash. As a result, CPS shares will gradually trade up to the $50 price as the closing date approaches. With CPS currently trading in the $48 range, we maintain our Hold recommendation with a $50 price target on the shares of CPS.
Staying Cautious on MCG Capital
MCG Capital Corporation's (MCGC) 1Q08 DNOI (distributable net operating income per share) was 7 cents short of our estimate and the consensus. GAAP EPS also fell considerably short of our expectation. The decline in earnings was primarily driven by the net investment losses of $18.6 million.
The company reduced its dividend to $0.27 per share from $0.44 per share. We anticipate the ongoing disruptions in the capital markets to continue in the coming quarters, thereby bringing a further deterioration in the originations in the coming quarters. Further, with heavy exposure to small and midsized companies, MCGC remains quite susceptible to the economic downturn. We are maintaining our Hold recommendation on the shares.
We believe that as a BDC / RIC [business development company and a regulated investment company], MCGC should trade primarily based on its prospective cash yield. Currently, MCGC trades at a price representing a 25.1% expected yield, a 49% premium to the peer group median (vs. a 106% premium in April). On a price-to-book basis the share trades at 0.35x, a 55% discount to the peer group median of 0.78x, which looks quite attractive given that MCGC's ROE, is at a 30% premium to the median.
The stock continues to look attractive on a P/E-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate. MCGC's PEG ratio is 0.45, a 55% discount to the 0.99 median for the peer group. Our new six-month target price of $4.75 per share incorporates multiples of 4.6x our forward DNOI per share estimate for the year 2008 and 0.40x our estimated book value six months out.
