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December 13, 2007

Brian Bolan
Director of Research;
Recent price: NILE 68.72

Upgrading Blue Nile to a Hold from a Sell


The rollercoaster ride is far from over, but we believe that now is a good time to re-visit our
recommendation on Blue Nile. After issuing a sell rating on 5/21/07, the stock did nothing short of
double. In its steep upward trajectory, we reassessed our price target two times (once when we issued the
original sell report and once at the end of August) but it was meet with little exposure from media outlets
or the market in general. We now see a stock that is fairly valued and we are upgrading our rating to hold
from sell.


Blue Nile is set up to beat the street again in the coming quarter, as consensus estimates are likely a bit too
soft. We are in the camp that believes that guidance is generally a tad weaker than what is to be expected,
and we are ahead of managements expectation on both the top and bottom lines. We are expecting strong
growth in orders to provide much of the upside in the coming fourth quarter.


After a long year of trying to convince Wall Street that Blue Nile was worth around $70 a share, we have
finally been proven correct (somewhat). We continue to believe in the overall story that is Blue Nile, but
believe that there are some near term tailwinds that can produce a strong 4th quarter and healthy 1st quarter
of 2008. After that time, the headwinds may cause use to resume our negative bias towards the stock. At
this time, however, we recommend that investors hold the stock as we maintain our $70 price target.

Important Disclosures
Jackson Securities, LLC does or seeks to do business with companies covered in its
research reports. As a result, investors should be aware that the firm may have a conflict
of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decisions. Please also refer to
the important disclosures found on pages 4 thru 6. Analyst Certification is found on
page 4.

Orders and ASP’s

We are estimating for the fourth quarter of 2007 that orders improve 23% from the same period last year
and climb over the 85,000 mark. A somewhat challenged ASP of $1,400 could be the monkey wrench in
the scenario as our checks indicate that estimate may be a little aggressive. That said, we are staying with
our original estimate which calls for a topline number of more than $119M.


∗ Significant TV ads from competitors might bring more traffic to Blue Nile.
∗ Bad weather in the early portions of December could point more people to the internet to complete
holiday shopping.
∗ Indications from third party data providers continue to point to a strong holiday sales season.

Target Price and Model

Our target price of $70 is based on our expected earnings per share of $1.06 for 2007. This means a 66x
multiple is being used in this instance. We expect to update our model for 2008 estimates in the coming

Source: Jackson Securities, company reports

Hold initiated 2/07/07: $39.18 Downgrade to Sell 5/21/07 : Sell 8/31/07: 82.93
Target: $40.00 $53.05 Target $46 Target:$70

Sell 11/09/07: 82.55 Upgrade to Hold 12/13/07: 68.72

Target: $70 Target: $70


Analyst Certification
I, Brian Bolan, hereby certify that the views expressed in this research report accurately reflect
my personal views about the subject securities and issuers. I also certify that no part of my
compensation was, is, or will be, directly or indirectly, related to the specific recommendations or
views expressed in this research report. I may be compensated in part based on the overall
profitability of Jackson Securities, LLC, which includes earnings from investment banking and all
other aspects of the firm’s business.

Conflicts of interest:
Neither Jackson Securities nor any of its publishing analysts or their immediate family members
has a position in the securities described herein.

• The research analyst has not received compensation based upon investment banking
revenues or from the subject company in the last 12 months.
• Jackson Securities has not in the last 12 months managed or co-managed a public
offering of securities, received compensation for investment banking services from the

subject company or any compensation for products or services other than investment
• Jackson Securities will seek investment banking compensation from the subject company
in the next 3 months.

Position as Officer or Director:

Neither the research analysts nor members of their immediate households occupy positions as
an officer or director with the company/companies mentioned in this report.

Market Making:
Jackson Securities does not make a market in this stock

Explanation of Ratings:
Buy - Expected 12-month absolute performance of +10% or higher than the market price at which time
the rating was issued.
Hold - Expected 12-month absolute performance of +5% to –5% from the price at the time the rating was
Sell - Expected 12-month absolute performance of –10% or lower than the market price at which time the
rating was issued.

Distribution of Ratings:
Jackson Securities, LLC has a distribution of ratings among its coverage universe as follows:

Buys – 50.0% (19 of 38 active recommendations)

Holds – 44.7% (17 of 38 active recommendations)
Sells – 5.3% (2 of 38 active recommendations)

Jackson Securities has provided investment banking services within the previous 12 months with the
following percentage of the companies they have rated:

Buys – 0.0% (0 of 38 active recommendations)

Holds – 0.0% (0 of 38 active recommendations)
Sells – 0.0% (0 of 38 active recommendations)

Risks: General economic conditions, economic slowdown/recession, adverse industry news.

Other Important Disclosures and Disclaimers

Disclaimer: This communication is neither an offer to sell nor a solicitation of an offer to buy any
securities mentioned herein. This material should not be construed as an offer to sell or the solicitation of
an offer to buy any securities mentioned herein in any jurisdiction where such an offer or solicitation
would be illegal. We are not soliciting any action based on this material. This document is for general
information only, and it does not constitute a personal recommendation or take into consideration the
particular investment objectives, financial condition or financial needs of any clients. Before acting on any
advise or recommendation in this research report, clients should consider seek professional advice. Past
performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original
capital may occur.

The information contained herein has been obtained from sources that we believe to be reliable, but we do
not guarantee its accuracy or completeness. Any opinions expressed herein are statements of our

judgment on the date appearing on this material only and are subject to change without notice. We
endeavor to provide updates on a reasonable basis of the information discussed in research reports, but
there may be reasons which prevent us from doing so.

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