Prudential's views on WHIT:
Prudential Equity Research
March 3, 2000
James D. Dougherty (212) 778-2055
Ellen M. Battiggi (212) 778-4839
INVESTMENT CASE/VALUATION: The exchange of shares that closed the merger transaction with USWeb/CKS occurred on March 1. We are initiating coverage of Whittman-Hart with a Strong Buy rating and a target price of $124. WHIT is surely the biggest company on our list of comparable Internet professional service companies, and arguably in possession of skill sets at least equal to the other companies on this list. We expect the company to benefit fully from the extremely positive outlook for Internet professional service companies as many businesses around the world gear up to do business on the Internet. At the same time, WHIT is priced at 5.6X estimated revenue in 2000 versus 13.8X for the comparable companies, or 11X with the highest and lowest multiples discarded. Our target price is based on the 11X multiple of the peer companies on estimated revenue in 2001 of $1.97 billion. When the merger was announced last December, both WHIT and USWB dropped sharply, and have since made a partial recovery. All manner of reasons for the drop circulated through the investment community, most of which had no substance, in our opinion. In our view, WHIT exchanged part of its valuation at the time to acquire a $900 million company with skill sets complementary to its own. We note that, on average, the stocks on our comparable company list have declined 19% since January 1, 2000 versus an 11% decline for WHIT and a 6% decline for the S&P 500. None of these companies now possess a $900 million business that they did not have before. When considered in this light, the transaction looks astute to us.
WE ESTIMATE REVENUE IN 2000 AT $1.41 BILLION
This would compare to total revenue for the two companies in 1999 of $992 million, which was up 76% over the comparable number for 1998. As with all companies in this space, we believe that the most important revenue metric to watch is sequential quarter-to-quarter revenue growth on an organic basis. We estimate this growth in a range of 8%-10% for 2000 and 2001. In considering these growth rates, we note that our revenue estimate of $1.41 billion for WHIT in 2000 compares to average estimated revenue for the comparable companies of $224 million. We estimate the other important revenue metrics as follows: revenue per head-$200,000; revenue per billable head-$250,000; average hourly rate billed-$190; net new hires per quarter-400, leading to total headcount by the end of 2000 at 10,000. We expect all to compare favorably with the comparable companies. |
