drugstore.com's (DSCM) first quarter sales were in-line with our forecast, but its EPS were $0.02 shy of our estimate. The earnings miss was due to the company's operating expenses coming in $1.5 million above our forecasts.
What's more, management, citing a challenging economic environment, issued disappointing guidance for the second quarter and full-year 2008. The weaker-than-anticipated outlook indicates that drugstore.com may not be profitable on a full-year basis until 2009. That said, the company continues to show steady improvement quarter after quarter, and we expect that to continue for the next several quarters.
We reiterate our Buy rating on the stock, but we are lowering our target price from $4.50 to $4.00, which is derived using a price-to-sales ratio of 0.75x. DSCM shares trade at a discount to its industry peers based on price-to-sales and price-to-book ratios.
Note: the company has no earnings and, thus, no price-to-earnings multiple. In our view, the company's lack of profits and difficult competitive environment warrant a discounted valuation relative to its peers. On the other hand, with the company moving closer to becoming profitable, its stock should still be able to trade at a price-to-sales multiple of 0.75x our 2008 sales estimate, or $4.00 per share.
Read the full analyst report on DSCM.
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