comScore Networks Scores a Buy With Deutsche Bank, Credit Suisse

So, how does the firm that ranks the world’s Web sites stack up? Four of the stock's underwriters who took comScore Networks (SCOR) public on June 27 are out with reports, two of which are at Buy, one of which is merely Market Perform, and the other is a Hold. Jefferies & Co., Friedman, Billings, Ramsey, Deutsche Bank, and Credit Suisse are the culprits. William Blair & Co., the fifth underwriter, is awol at the moment.

From the looks of things, the notes are not helping the stock, with shares trading down over 6% at $22.85, below the close of $23.47 on the stock’s first day of trading.

Well, first, here’s the good news. Under the banner “Creating the currency of the Internet” (I thought that was PayPal), Deutsche Bank’s Jeetil Patel says the stock is worth $28, substantially above Monday’s trade, and says investors should buy the stock because the “currency” that comScore is creating is the ability to measure the success of Web sites, which is what everyone wants to know about. Patel notes that comScore has 800 customers via 687 subscriptions for its Web rankings, and he thinks that the growing base of subscription revenue provides good visibility into the company’s future performance. Revenue next year should rise to $110 million from $86.5 million this year, and earnings should rise 55% to 87 cents per share. Patel justifies a pricey multiple thusly:

Note that the shares are currently trading at 28x our 2008 earnings estimate (45x tax-adjusted EPS) and 23x 2008 [earnings before interest, taxes, depreciation and amortization or EBITDA] estimate for a business growing its top-line by 26% for the next four years, and almost 40% on the bottom-line. Additionally, given the recurring nature of the top-line, we think that shares should trade in-line or at a premium to the other companies (that are/have participated in the measurement services market). Currently, the shares trade in line with Nielsen-NetRatings’ multiple this time last year (on out-year multiples) with comparable growth rates albeit with better EBITDA margins.

Over at Credit Suisse, Heath Terry has an Outperform rating on the stock and also has a $28 price target. Terry’s estimates are a little more conservative than Patel’s, with the expectation of $108 million in sales next year and only 68 cents in earnings. He projects a 20% or so EBITDA margin over the next several years, a bit below Patel’s 24% estimate. Terry says both online retailers and advertisers will increasingly have a need for the company’s Web site measurements, while the major risk he sees is that it’s going to be such a hot market, more competitors are bound to enter the fray:

Despite barriers to entry, the growing importance of the Web measurement and the analytics industry will likely prompt the entrance of more competitors. With the company’s biggest competitor, NetRatings, fully a part of Nielsen, we believe competition will also scale up more intensely. Finally, we believe panel acquisition costs could increase over time should comScore seek to grow its panel size or expand into other geographies.

Which brings us to Friedman, Billings, Ramsey, whose analyst Chris Penny has the same $28 price target, but, with the stock enjoying a recent multiple of 30x Penny’s 80 cents a share, Penny cautions that “we would like to wait for a better entry point to start accumulating shares again,” given the rise from the stock’s offer price in June of $16.50. Penny, however, cites numerous factors that sound just as bullish as Terry and Patel: The amount of money to be spent in online advertising seems underestimated every year, notes Penny, suggesting that online ads are still a tremendous growth market that will need comScore’s Web site rankings to guide ad buying. Comscore has “a well-established brand name,” constantly popping up in newspapers and online stories about Web traffic (that’s true) .And the barriers to entry may be as great as the potential for new competitors: besides spending millions to run a focus group to measure Web site popularity, comScore had huge initial capital investment to be able to process all the Web traffic statistics it acquires, blocking startups from getting in.

Jefferies & Co.’s Youssef Squali is more negative. While comScore has “high operating leverage” based on the ability to gain increasing business off the “flattish” cost of running a survey panel, he thinks the stock is fairly valued at about 31.6x his estimate of 77 cents in earnings per share next year. His discounted cash flow valuation model shows a compound annual sales growth rate of 26% over the next five years, and an EBITDA margin approaching 30.5% over the long term, for a price target of $25. The group P/E, he points out, is just 17.8x forward earnings. In addition to the matter of more competitors coming into the market, Squali notes the usual caveat, that sellers may dump shares after the lockup period expires, and the prospect of the company’s ratings being called into question – though it’s hard to imagine that happening with the company being such a household name for ratings.

So there you have it: highly promising company, pricey stock, trading down Monday. You be the judge.