A Corporate Executive Board Valuation

I just did a 3 stage DCF valuation of Corporate Executive Board, which stated that there will be three phases of CEB’s growth

1. Extraordinary Growth: Next 5 years of 20% per annum
2. Transition: Years 6-10 declining from 20 to 10% growth
3. Growth Into Perpetuity of 6.5%
4. I also gradually expanded operating margins as they have tons of operating leverage and the business requires less investments in the future when they transition from growth stock to cash cow (eventual result, post year 10).

Some basic info about their business is available on their website, and on this blog.I got a value of $168 per share with this, compared to its current price on about $75. The stock has been hit hard recently due to some concerns about subscriber growth going forward and the cross sell ratio of programs. I think that the stock has been hit unfairly and that the market percieves as being worse than they are. If anyone noticed any errors I did or ways to refine/improve this, please tell me.

The PDF link is available here 

A Gem in the Subprime Space

One name that stands out to me in this supbrime mess is Capital One financial. You probably know them for their credit card business, but by the end of this fiscal year that’s only going to be half of their revenue. The stock has done pretty much nothing over the past year, as concerns over the North Folk Bank integration has weighed on shares amid a rising market. Whats great about this company is that 2007 will be a turning point year, as return on equity and growth increase from prior years. The company’s transition from a credit card company with below average growth to a diverse financial services firm has come at the cost of shareholder returns, but this year that should end. Another thing that people have to realize about this company is that the charged-off rate on their credit cards is the lowest its been in the past 10 years ( at only 2.2%), and the deliquency rate has gone down every year since 2002 (3.2% now vs. 5.6% then), so clearly its unfair to punish them for New Century and Accredited Home Lenders’ problems because they don’t have much to do with COF. Finally, the transition from a subprime credit-card lender to a credit card, mortgage, auto loan and banking company has brought its P/E down to 9.7-10.3x management’s projected 2007 earnings and less than 1x book value. I think thats too cheap.

Costco “Pin Action”

You probably have heard the news that Costco is abandoning its policy to allow full returns on electronics forever. It apparently cost them hundreds of millions of dollars in “fraud” like returns when people would return “broken” tv’s and replace them with newer ones. I know a lot of people who buy electronics exclusively from Costco for this reason, and I think that more and more people are not only going to be buying more from Circuit City, Best Buy and Staples, but also buy the extremely high margin warranties! Staples just reported a great quarter and fell with the rest of the 498 or so S&P 500 members who also fell this week, and is now attractively priced. Best Buy and Circuit City should continue to do well, especcially after this Costco announcement.