Greenfield Spending to Expand

Greenfield Online, Inc. (SRVY) reported a solid 2007 fourth quarter, with revenues and EPS exceeding our estimates. The company's new B2B initiative, along with its growth in Europe, should help boost revenues going forward.

Our confidence is bolstered by the fact that the company will continue to increase spending for the roll-out of higher-margined comparison shopping business in the U.S. The new employee-incentive plan could also engender over-achievement of revenue targets going forward. We have raised our revenue & EPS estimates for 2008 and 2009, and believe that the company will also continue to invest in its existing businesses.

The company remains highly regarded among users of market research data, and we are encouraged by continued customer satisfaction rating in the high 90s in terms of percentages. However, we are still concerned about the company's ability to sustain its current growth spurt, which was partially helped by the strength in the Euro and British pound versus the U.S. dollar in the fourth quarter. The overall results in the fourth quarter of 2007 were much stronger than expected, and we expect the company to grow revenues by 18% year-over-year growth in 2008 and 2009, although the company will continue to increase spending in R&D expenses for developing core operating systems and Ciao roll-out in the U.S. in 2008.

The company's strategy to reward its employees for over-achievement of revenue targets seems to be paying-off, despite higher bonus-related expenses in the quarter. The new initiatives in B2B surveys, expansion in Europe, China and Japan and the continuing effort to create a unified technology platform for the entire business globally bodes well for future revenue growth and improved efficiencies. We continue to rate shares of SRVY a Hold, and we have fixed our target price at $14 over the next six months based on the company selling between 24.5x and 25.5x our 2008 earnings estimate of $0.56 per share.

Udayan Mukherjee contributed to this report.

Newer Solutions Impairing Embarq

We maintain our Sell rating for Embarq (EQ) based on lower than expected revenue trends through 2008. EQ, the fourth-largest local U.S. telecommunications carrier, has emerged following the spin-off of Sprint's Local Telephone business on May 17, 2006.

We believe that the local phone business in North America, in particular service offered by regional carriers, has significant challenges ahead. Local access lines continue to decline and consumers and business customers are transitioning to alternative solutions, including VoIP, wireless and cable offerings.

We also believe pricing pressure and the need to invest further in broadband infrastructure may strain overall operating margins, impacting various earnings metrics. The high level of debt is also a matter of concern. Furthermore, EQ's wireless operation is leveraged from Sprint Nextel (S), and not organically owned by the company, which may limit overall financial return on its third party services.

EQ is trading at 10x earnings for 2007, and 9.4 times the estimated earnings for 2008, both of which represent discounts to the P/E ratios for the S&P 500 and peer group (consisting of other primarily fixed-line telecom carriers). On the basis of enterprise value (EV) to EBITDA, a more appropriate valuation metric for highly leveraged companies, EQ is trading at approximately 4.9x estimated 2008 EBITDA. This is below the industry group average of 5.2 for the peer group.

While we recognize that the company's stable cash flow and high dividend yield are attractive, we believe there still remains a high level of uncertainty as EQ operates independently from Sprint Nextel. We are also concerned with continued competitive threats, the recurring drop in local access lines (which is at the higher end of regionalized telephone carriers) and the recent spike in the company's valuation level, which appears to price the company at a more aggressive growth level that may not be achieved. Therefore, we provide a $41 target price based on a decline of EV/EBITDA multiple to 4.7x on 2008 EBITDA.

Rangana Bhattacharya contributed to this report.

Energizer Curtails Share Buybacks

Energizer Holdings, Inc. (ENR) was spun-off from Ralston Purina Company in 2000.