Gevity HR upgraded on deep undervaluation
Shares of Gevity HR, Inc. (Nasdaq: GVHR) are climbing on high volume today after JMP Securities upgraded the provider of human resource management to “market out perform” from “market perform” based on deep undervaluation.
After being pummeled by earnings disappointments, a rough macroeconomic environment and business model changes, JMP Securities analyst Kevane Wong says that valuation on the stock is “overdone,” as it trades below its hard book value of $4.32, according to the analyst.
The stock’s current valuation reflects market expectations that Gevity is likely to go out of business; however, Wong says he recently received a vote of confidence from a major vendor to Gevity that refuted his initial concern regarding risk of further client attrition due to changes in the company’s business model — a key source behind the stock’s current valuation. According to Wong, a major vendor to Gevity told him that “indications from this year’s open enrollment process point to a fairly stable customer base at Gevity going into 2008.”
A glimmer of positive news has indeed emerged, but the nature of Gevity’s uncertain future business and other signs signal that shrewd investors might heed caution. Gevity’s common stock currently trades with an 8.5% dividend rate. According to Wong, management indicated on the company’s third-quarter earnings call that it intends to continue to pay dividends “subject to board approval”.
“This clearly leaves the door open for a cut or discontinuance of the dividend,” Wong wrote in a research note today. The analysts said he believes the decision surrounding the dividend will depend on the outcome of the company’s revolving debt renegotiations and 2008. Wong noted he would view a continuance of the dividend as a particular vote of confidence by the company.
“While there are clearly ongoing risks, we believe the current valuation on the stock outweighs the downside risks to the stock,” Wong wrote. Wong has tacked a price target of $7 on the stock.
Shares of Gevity (GVHR) jumped 23.09%, or $0.98, to $5.23 at 12:56 p.m. ET. Shares of Gevity have been trading in the range of $4.06 and $24.11 for the past 52 weeks.
