(By Balaseshan) Deutsche Bank analyst Matt Chesler downgraded rating on shares of comScore Inc.
) to "Hold" from "Buy", saying he awaits more convincing signs of execution. The brokerage lowered its price target to $13 from $25.
While Chesler thinks comScore remains well positioned to provide some of the tools in an increasingly fragmented media ecosystem, the disappointing Q2 result and guidance suggests a struggle to scale profitably, near-term headwinds, and less stability and predictability.
comScore missed Q2 EBITDA by 18% and has cut fiscal year guidance by 28% (deeper implied 2H cut). Cited were extended ramp on new products, particularly vCE, wind-down of copy-testing business, weaker U.S. dollar, and worsening macro conditions, particularly in Europe. The one bright point was MRC accreditation for vCE, but even this is only partial (validation component only).
The analyst's $13 price target is based on 10 times 2012 EBITDA, in line with peers. comScore has always traded at a premium multiple because of its exposure to digital, which was expected to lead to higher growth at scale, as well as greater perceived stability due a diversified base of customers and high visibility from its subscription based business.
However, sustainable profitable growth has been elusive, as comScore has invested behind a strategy to pursue a larger total market opportunity, Chesler noted. While organic revenue growth is roughly 18% p.a. since 2007, profit and cashflow growth is significantly lower (low teens), and free cash flow per share is pretty much flat.
The analyst said the business has also proved to have lower visibility and predictability than expected, which argues for a lower multiple. All in, it is no longer clear that comScore deserves a premium, despite the historically faster topline growth.
Chesler now has 2012 revenue growing just up 7% (up 20% previously) and EBITDA margins contracting 310bp (up 140bp previously). This results in an 11% cut to revenue and a 30% cut to EBITDA (second half down 18% and down 41%, respectively).
The analyst's 2012 proforma EPS actually increases from $1.04 to $1.09, but this is due to the favorable tax adjustment in Q2, whereas his Q3 and Q4 EPS both come down.
SCOR is trading 20.06% lower at $12.35 on Friday.