$12 Target on Smith Micro

Smith Micro (SMSI) is a developer of wireless communications software and utility software for multiple OS platforms. It has significant relationships with several large cellular providers and OEM cell phone manufacturers.

The conversion from selling Music Essentials kits to bundled software with the phones is occuring much quicker than anticipated. As a result, we are reducing our revenue and earnings forecasts. Earnings, untaxed prior to 2008, will be fully taxed in 2008 and subsequent profitable years.

Our rating remains a BUY with a target price of $12. Although the communications software market is highly competitive, there is no direct analog of Smith Micro. The closest in nature is Symantec (SYMC) with its suite of diagnostics and utilities. However, QuickLink Mobile is usually sold in conjunction with a PC card and there are two companies in this market.

Qualcomm's (QCOM) markets are driven by new infrastructure and phone technology. There are also two very small companies in the voice and data communications market, Xfone and Roaming Messenger. The latter company is too small to provide meaningful comparisons.

Smith Micro is currently selling at below the group averages. Since future earnings will be fully taxed, we feel that the P/E ratio should be closer to the growth rate. This equates to a price close to our target of $12 a share. 

Upping Grupo Televisa to Buy

We are changing our recommendation on Grupo Televisa S.A. de C.V. (TV) Global Depositary Shares (GDS), from Hold to Buy. After a few quarters of disappointing results during 2007, fourth quarter 2007 figures were better-than-expected.

The outlook for the media industry is more positive in 2008, due to the U.S. presidential campaign and the Olympic Games. Moreover, the new investments in the telecom area and the gambling business are quite encouraging and should keep on growing in the following quarters.

Currently, Grupo Televisa GDS trades at 14.6x our 2008 earnings estimates, a considerable discount to the industry mean and a small discount to the industry median. The company has been posting great operating results in recent years, even though results in the first three quarters 2007 were disappointing. Nevertheless, fourth quarter results were positive and the company still has a dominant position in the Mexican market.

Additionally, Televisa has been expanding to the U.S. markets and to Europe and its new investments in the gambling business, telephony and the Internet content are very encouraging. We expect the company's 2007 P/E multiple to trade closer to the industry median, we understand TV should trade around 17x our 2008 earnings estimates in the short-term. Accordingly, our target price is $26.50.

Headwinds Pressuring Safeway

Safeway, Inc. (SWY) reported in-line results for the fourth quarter and reiterated its fiscal 2008 guidance. The company expects identical-store sales growth of 3%-3.2% and earnings per share of $2.25-$2.35.

We continue to believe Safeway's remodeling efforts, Lifestyle stores, and Blackhawk gift card business are reasons to be bullish on the stock. Even so, we think these positives are offset by headwinds such as consumers trading down, labor issues, and food inflation.

Total sales increased 6.8% to $13.4 billion in the fourth quarter of 2007 compared to $12.5 billion in the fourth quarter of 2006. Contributions from Lifestyle stores, increased fuel sales and an increase in the Canadian dollar exchange rate drove this increase. Identical-store sales increased 4.4%.

Excluding fuel, identical-store sales increased 2.7%. The company had net income of $301.1 million and diluted earnings per share of $0.68. However, diluted EPS were increased by $0.08 due to various favorable tax items.

Safeway shares are trading at 13x our 2008 EPS estimate and 11.6x our 2009 EPS estimate. This valuation is in-line with its primary competitors.