Shutterfly to Trade at Discount

Shutterfly, Inc. (SFLY) is a leading provider of Internet-based social expression and personal publishing service. We rate the shares a Hold following the release of Q2 financial results.

Shutterfly has no pure-play, publicly traded peer at this time. While competition in the space is intense, many of the company's competitors are owned by larger corporations. Given the outlook for negative earnings growth in 2008, along with uncertainties related to consumer spending in the slowing economy and potential pressures stemming from price discounting by competitors such as Snapfish, we believe that the company should trade at a discounted multiple.

We expect a substantial decline in EPS this year, although anticipate EBITDA to be down only slightly in 2008, and note that company is in a very solid financial position, with no debt and approximately $3.50 per share in cash and investments. Our price target of $10.00 per share equates to a multiple of approximately 5x our 2008 EBITDA estimate, plus cash and investments currently on the balance sheet.

The company has stated that it expects the fourth quarter of the year, which in 2007 accounted for more than 50% of annual sales and the only positive earnings quarter in the year, to account for an even greater percentage of annual sales in 2008. As such, we anticipate making revisions to our outlook throughout the year as we gain increased visibility regarding the company's position heading into Q4 2008.

Omnicell Not Without Risks

Omnicell Inc. (OMCL) reported solid topline growth in the second quarter. However, expenses related to the Rioux acquisition dampened gross and operating margins. Favorable demographic trends, reinforced by a complimentary regulatory environment, are expected to sustain strong growth in demand for hospital services over the foreseeable future.

During the second quarter, growth was seen across both Product and Service revenue. We expect the continued market expansion combined with a penetration rate of less than 50% will translate into solid earnings growth over the long term. The company expects to end 2008 with its backlog in the range of $135 million-$145 million, compared with $137 million recorded at the end of 2007. The company continues to execute against competition with new product flow and acquisitions. OMCL also continues to win new contracts, and maintain its quality customer service orientation.

While the company is growing faster than its peers, the apparent lumpiness in backlog build increases the risk of earnings shortfall. Moreover, the reliance upon contract manufacturing for the newly acquired Mobile Cart technology adds meaningful execution risk.

OMCL currently trades at 2.3x our 2008 sales estimates, a premium to the average of comparables and the industry median (2.1x 2008 sales). While the stock has made gains toward our previous price target of $21, we are moving to a valuation range of 2.2x to 2.5x in light of the increased execution risk. Placing our target at the midpoint, 2.35x 2008 sales, we derive a target price of $18.50.