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June 2009



Quest Diagnostics, Inc. - A Wax Ink Raw Value Short Report

June 28, 2009 – Comments (0) | RELATED TICKERS: DGX , GSK

Hmmmm   [more]



Stayer Education - A Wax Ink Raw Value Report

June 21, 2009 – Comments (2) | RELATED TICKERS: APOL , CPLA , COCOQ.DL

How It Got Here

Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on February 17, 2009.

The Company

Strayer Education, Inc. (Nasdaq: STRA) is a for-profit post-secondary education services corporation whose mission is to make high quality, post-secondary education achievable and convenient for working adults in today’s economy.

Founded in 1892, Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration at 65 physical campuses in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, West Virginia, and Washington, D.C.

As of December 31, 2008, the university had more than 44,000 students enrolled in their programs. Strayer University is accredited by the Middle States Commission on Higher Education, one of the six regional collegiate accrediting agencies recognized by the U.S. Secretary of Education. As part of its program offering, the University also offers classes online via the Internet, providing its working adult students a flexible and convenient alternative.
Over the last several years, the company has experienced significant growth, primarily by expanding geographically by opening new campuses. Since the company's initial public offering in 1996, they have grown from eight campuses in one state and Washington, D.C., to 65 campuses in 14 states and Washington, D.C.

The company's stated mission is to serve working adults’ demand for post-secondary education. To achieve this objective the company has opened new campuses in promising areas in those states in which they currently operate physical campuses, as well as by expanding into contiguous states that exhibit strong demand for adult education in business and information technology programs.

The company has opened 51 of campuses since the beginning of 2001 and currently plans to open 11 new campuses in 2009, including five already opened.

Since receiving regulatory approval to offer our degree programs online in 1997, online programs have experienced rapid growth, with over 32,000 students enrolled in at least one class online during the 2008 fall term. To better serve students who do not reside or work near a physical campus location, the company plans to open a second Global Online Operations Center in 2009.
In May 2001, management hired a new senior management team, made significant investments in information technology infrastructure to support planned growth in its online programs, and began a long term program to open new campuses in areas where there is a strong demand for adult education. These efforts have allowed the company to grow revenues between 2000 and 2008 by 23% on a compound annual basis.

During the same period, diluted earnings per share grew at a compound annual rate of 19% including the impact of stock-based compensation which the company began recording in 2006.

Dollars In

The company charges tuition by the course. Each course is 4.5 credit hours. As of January 1, 2009, undergraduate full-time students are charged $1435.00 per course, undergraduate part-time students are charged $1510.00 per course, and students in graduate programs are charged at the rate of $1945.00 per course.

Accordingly, a full-time student seeking to obtain a bachelor’s degree in four years currently would pay approximately $14,000 per year in tuition.

Strayer University implemented a tuition price increase of approximately 5% per course effective January 1, 2009, which is reflected in the above tuition rates.

Under a variety of different programs, Strayer University offers scholarships and tuition discounts to active duty military students and in connection with various corporate and government sponsorship and tuition reimbursement arrangements.

Dollars Lost

Strayer University’s cohort (student loan) default rates on FFEL Program loans for the 2004, 2005, and 2006 federal fiscal years, the three most recent years for which this information is available, were 4.5%, 3.9%, and 3.8%, respectively, while the default rates for proprietary institutions nationally were 8.6%, 8.2%, and 9.7% in federal fiscal years 2004, 2005, and 2006, respectively.

Dollars Out

The company leases all of their campus and administrative facilities except for five campus facilities which they own. Their campuses are located in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, West Virginia, and Washington, D.C., and their corporate headquarters is located in Virginia.

Leases generally range from five to ten years with one to two renewal options for extended terms. As of December 31, 2008, the company leased 67 campus and administrative facilities consisting of approximately 985,000 square feet. The facilities the company owns consist of approximately 110,000 square feet.
Management evaluates current utilization of facilities and projected enrollment growth to determine facility needs. The company anticipates that approximately an additional 200,000 square feet will be leased in 2009. The company also signed a lease for approximately 100,000 square feet in Herndon, Virginia for their corporate headquarters. Occupancy of the space is scheduled for 2010.


The company paid dividends during fiscal 2008 of $3.65 per share. But that dividend payout, included a one-time special dividend of $2.00 per share as declared by the Board of Directors on October 30, 2007, and paid on January 16, 2008.

Majority/Controlling Stakeholders

According to the company's latest SEC Form DEF 14A filing  of March 23, 2009, Fidelity Management and Research owns or controls 12.6% of the outstanding shares of company stock, Baron Capital Group owns or controls 9% of the outstanding shares of company stock, and the ever present Barclay's Global Investors owns or controls 5.4% of the outstanding shares of company stock.

Curiously, Chairman and CEO Rober Silberman owns only 2% of the outstanding share of company stock, but that 2% includes 183,680 restricted shares which were granted on February 10, 2009 and won't vest 100% until February 10, 2019. Mr. Silberman however does have the right to vote these shares that he does not yet own, as well as receive cash dividends on these shares that he does not yet own. He simply cannot sell them...because he doesn't yet own them?

Collectively, all of the Directors and Executive Officers of the company own outright, or have vesting interest in, 479,275 of the outstanding shares of company stock, or about 3.4% of the total shares outstanding.


The company does not offer any perquisites except for reimbursement of relocation expenses including tax gross-ups, when applicable. This perquisite is offered to any named executive officer hired from a different location to encourage prospective executives to relocate.

Director Compensation

Annual Retainer.  Each eligible director is paid an annual fee of $80,000 in quarterly installments. Of this amount, 50% (or $40,000) of the annual fee is paid in cash and 50% in shares of restricted stock. Instead of receiving a cash payment, directors may elect to have up to 100% of their annual retainer paid in restricted stock.

Restricted Stock.  As part of the annual retainer, $40,000 — $80,000 of restricted stock is issued to directors on the date of the annual meeting. The stock vests over three years, with one-third of the stock vesting each year. In the event any eligible Director wishes to retire from the Board of Directors, or wishes to resign from the Board to serve in another capacity that might preclude further service on the Board of Directors, and holds shares of unvested restricted stock in the corporation, the Board of Directors may, in its discretion, waive the remaining vesting period(s) for all or any portion of such shares provided that the Director shall have served at least five years on the Board of Directors of the Corporation.

Fees and Reimbursements. Members of the Audit Committee receive an additional fee of $1,000 per meeting, generally $4,000 per year. In addition, directors are reimbursed for out-of-pocket expenses incurred in connection with their attendance at Board and Committee meetings.

Related Parties

The company had no transactions with related parties during the fiscal year ended December 31, 2008, and prohibits conflict of interest activities by any Director or Officer unless specifically approved in advance and in writing by the company's General Counsel, CEO, and the Audit Committee of the Board of Directors after full disclosure of all aspects of the activity. In addition, company policy dictates that any such activity will be publicly disclosed.


While there are other companies in the same Industry Sector, there are few that can compete directly with Strayer. Certainly Apollo Group, Inc. (Nasdaq: APOL), Capella Education Company, Inc. (Nasdaq: CPLA), and  Corinthian Colleges, Inc. (Nasdaq: COCO), all offer similar degree programs, but we believe only Strayer has taken the time to understand that tuition and campus location are the keys to success in their industry. Accordinly, we anticipate that the company will continue to dominate its competition.  

Investment Thoughts

We are not about to pay $216.09 per share to own this stock, which was a recent closing price. The reason we are not is because it is on our watch list with a Reasonable Value Estimate of $146.74, a Buy Target of $73.37, a First Sell Target of $143.07, and a Close Target of $154.88.

Admittedly, we are impressed that the company has been able to execute a fairly aggressive growth strategy over the past several years while keeping itself debt free. Not only has the company been able to increase its 2008 earnings from 2007 levels by almost 20%, the company has also managed to increase its 2008 Free Cash Flow from 2007 levels by almost 70%, ending fiscal 2008 with Free Cash Flow of $5.89.

How is this possible? All of the company's campus facilities, with the exception of 5 such, are leased. In addition, the company is reimbursed by the lessor for improvements made to the leased facilities. These reimbursements were capitalized as leasehold improvements and a long-term liability established. The leasehold improvements and the long-term liability are amortized on a straight-line basis over the corresponding lease terms, which range from five to ten years.

The company then records rent expense on a straight-line basis over the initial term of a lease with the difference between the rent payment and the straight-line rent expense recorded as a long-term liability. The company also records the non-current portion of the gain related to the sale and lease back of a campus facility as a long-term liability.

We found one other noteworthy piece of information in the company's latest 10-K...restricted cash. Generally cash is restricted because a lender requires a company to withhold from general corporate purposes, a specific amount of cash. Often, before these restricted dollars can be spent, the company's lenders have to have full understanding as to why the funds are needed, and loan covenants must be modified.

In the case of Strayer, we found that the company does have $500,000 of restricted cash in an interest-bearing account, and that while not listed specifically as restricted cash, the amount is included as a long-term asset.

The reason for the restricted cash? The State of Pennsylvania requires the company to maintain a “minimum protective endowment” before it can operate in the state. We are not sure what actual purpose this "endowment" serves except to allow the company to do business in Pennsylvania.

Investment Opinion and Worksheet

As we have stated, we are impressed with many things about this company, and at least on paper, it all seems to make sense...the reason for the company's growth rate, the year over year increases in earnings and free cash flow, even the company's restricted cash. It all seems explicable.

But we keep thinking of Bernie Madoff and how his company kept improving year over year, until finally it became mathematically impossible that such improvements could occur. When that happened, lots of people lost lots of money.

Certainly we are not saying the same is true with Strayer Education. What we are saying is that the stock price has had a meteoric rise over the past 13 years, moving from $6.31 in June 1996, to a recent close of $216.09, and that in our opinion the stock is extremely overvalued, as noted by a recent trailing twelve month PE of 40.

We also note that Tangible Book Value at the end of fiscal 2008 was $12.40, about the same as it was at the end of fiscal 2007, which to us, when coupled with the recent PE of 40, and the company's cash on hand of $3.97 per share, increases investment risk.

Accordingly, because we believe there is increased investment risk, and because we further believe that such risk will increase going forward, we have lowered our Buy Target from $62 to $54, and currently have the stock rated as a Sell.

Strayer Education Worksheet 1208




GameStop Corporation - A Wax Ink Raw Value Report

June 07, 2009 – Comments (0) | RELATED TICKERS: BKS , TGT , BBY

How It Got Here

Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending January 31, 2009, as filed with the Securities and Exchange Commission on April 1, 2009.

The Company

GameStop Corporation (NYSE: GME) is the world’s largest retailer of video game products and PC entertainment software, selling new and used video game hardware, video game software and accessories, as well as PC entertainment software, and related accessories and other merchandise. As of January 31, 2009, the company operated 6,207 stores in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games.

In addition, the company operates the electronic commerce website and publishes Game Informer, the industry’s largest multi-platform video game magazine in the United States based on circulation, with approximately 3.5 million subscribers.


For fiscal year ended January 31, 2009, the company operated its business in the following segments: United States, Canada, Australia and Europe. Of their 6,207 stores, 4,331 stores are included in the United States segment and 325, 350 and 1,201 stores are included in the Canadian, Australian and European segments, respectively.

Each of the segments consists primarily of retail operations, with all stores engaged in the sale of new and used video game systems, software and accessories, referred to as Video Game Products, and PC entertainment software and related accessories. Used video game products provide a unique value proposition to the company's customers, and the company's purchasing of used video game products provides its customers with an opportunity to trade in their used video game products for store credits and apply those credits towards other merchandise, which in turn, increases stores sales.

The company's products are substantially the same regardless of geographic location, with the primary differences in merchandise carried being the timing of release of new products in the various segments. Stores in all segments are similar in size at an average of approximately 1,500 square feet, with corporate offices and one distribution facility housed in a 510,000 square foot facility in Grapevine, Texas.


The company began operations in November 1996. In October 1999, the company was acquired by, and became a wholly-owned subsidiary of, Barnes and Noble, Inc. (NYSE: BKS). In February 2002, GameStop completed an initial public offering of its Class A common stock and was a majority-owned subsidiary of Barnes and Noble until November 2004 when Barnes and Noble distributed its holdings of outstanding GameStop Class B common stock to its stockholders.

In October 2005, GameStop acquired the operations of Electronics Boutique Holdings Corporation (EB), a 2,300-store video game retailer in the U.S. and 12 other countries, by merging its existing operations with EB under GameStop Corp.

In February 2007, all outstanding Class B common stock of the company was converted into Class A common stock of the company on a one-for-one basis and the company no longer had any Class B common stock. In March 2007, the company completed a two-for-one stock split of its Class A common stock and in January 2009, the company's Class A common stock traded on the New York Stock Exchange under the symbol GME.

In November 2008, GameStop France SAS, a wholly-owned subsidiary of the company, completed the acquisition of substantially all of the outstanding capital stock of SFMI Micromania SAS for $580.4 million, net of cash acquired. Micromania is a leading retailer of video and computer games in France with 332 locations, 328 of which were operating at the date of acquisition.

The company funded the transaction with cash on hand, funds drawn against its revolving credit facility totaling $275 million, and term loans totaling $150 million. As of January 2009, all amounts drawn against the revolving credit facility and the term loans have been repaid and the company’s operating results for the 52 weeks ended January 31, 2009 include 11 weeks of Micromania’s results.


The electronic game industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. In the U.S. the company competes with mass merchants and regional chains, including Wal-Mart Stores, Inc. (NYSE: WMT) and Target Corporation (NYSE: TGT).

The company also competes with product and consumer electronics stores, including Best Buy Company, Inc. (NYSE: BBY) and other video game and PC software specialty stores located in malls and other locations, as well as against toy retail chains, mail-order businesses, catalogs, direct sales by software publishers, and online retailers and game rental companies.

In addition, video games are available for sale and rental from many video stores, such as Movie Gallery, Inc. (Pink Sheets: MVGR.PK) and Blockbuster, Inc. (NYSE: BBI).

Competitors in Europe include Game Group plc (“Game Group”) and its subsidiaries, which operate in the United Kingdom, Ireland, Scandinavia, France, Spain and Portugal, and Media Markt, operating throughout Europe.

Canadian competitors include Wal-Mart, Best Buy and its subsidiary Future Shop, while the company's Australia competitors include Game Group, K-Mart, Target and JB HiFi stores.


All of the company's stores and most of its distribution facilities are leased. Leases typically provide for an initial lease term of three to ten years, plus renewal options. This arrangement gives the company the flexibility to pursue extension or relocation opportunities that arise from changing market conditions.

Management believes that as current leases expire the company will be able to obtain either renewals at present locations or leases for equivalent locations in the same area.

In addition, the company owns a 510,000 square foot facility in Grapevine, Texas, which houses their corporate headquarters and certain of distribution operations.

The company also owns an additional 65,000 square foot building at the Grapevine, Texas location which is currently being used for refurbishing operations.

Additionally, the company also owns an 80,000 square foot distribution facility in Arlov, Sweden, a 119,000 square foot distribution facility in Brampton, Ontario, Canada, a 120,000 square foot distribution facility in Milan, Italy, a 67,000 square foot distribution facility in Memmingen, Germany, and a 70,000 square foot distribution facility in Pinkenba, Queensland, Australia.

Legal Proceedings

On February 14, 2005, and as amended, Steve Strickland, as personal representative of the Estate of Arnold Strickland, deceased, Henry Mealer, as personal representative of the Estate of Ace Mealer, deceased, and Willie Crump, as personal representative of the Estate of James Crump, deceased, filed a wrongful death lawsuit against GameStop, Sony, Take-Two Interactive, Rock Star Games and Wal-Mart (collectively, the “Defendants”) and Devin Moore, alleging that defendants’ actions in designing, manufacturing, marketing and supplying defendant Moore with violent video games were negligent and contributed to defendant Moore killing Arnold Strickland, Ace Mealer and James Crump. Moore was found guilty of capital murder in a criminal trial and was sentenced to death in August 2005.

Plaintiffs’ counsel has named a new expert, a psychologist who testified at the criminal trial on behalf of the criminal defendant, who will opine, if allowed, that violent video games were a substantial factor in causing the murders. This same testimony from this same expert was excluded in the criminal trial from the same judge hearing this case. The testimony of plaintiffs’ psychologist expert was heard by the Court on October 30, 2008, and the motion to exclude that testimony was argued on December 12, 2008. The ruling on this motion will have an effect on whether the case is able to proceed.

The company is currently awaiting a ruling. There is no current trial date. The company does not believe there is sufficient information to estimate the amount of the possible loss, if any, resulting from the lawsuit.


Management information contained in this report is based on the company's Form DEF14A filing, as filed with the Securities and Exchange Commission on May 22, 2009.

The Board of Directors consists of eleven directors, broken into three classes as directed by the company's certificate of incorporation, with the term of each class of director being three years.

In addition, the certificate of incorporation provides that the authorized number of directors may be changed only by resolution of the Board of Directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.


The company does not have a formal program providing perquisites to its executive officers. Mr. DeMatteo (CEO), Mr. Fontaine (Executive Chairman), Mr. Raines (COO), Mr. Calrson (Executive VP and CFO), and Mr. Bartel (Executive VP Merchandising and Marketing) are eligible to use the company plane for personal use.

Mr. Morgan was eligible to use the plane until his resignation effective May 2, 2008.

Mr. DeMatteo, Mr. Fontaine, and Mr. Carlson occasionally use the plane for personal use and reimburse the Company for costs in accordance with IRS guidelines. Amounts disclosed for the personal use of the company plane represent actual incremental costs to operate the plane in excess of the amounts reimbursed in accordance with IRS guidelines.

In fiscal 2008, these amounts totaled $55,202, $43,743 and $4,684 for Mr. DeMatteo, Mr. Fontaine, and Mr. Carlson, respectively, and in fiscal 2007 these amounts totaled $75,559, $62,834 and $12,040 for Mr. Fontaine, Mr. DeMatteo and Mr. Morgan, respectively.

None of the named executive officers receives any other compensation or benefits which would be defined as perquisites.

Independent Registered Accounting Firm

The firm of BDO Seidman, LLP is the independent registered public accounting firm for the company.

The independent accountants examine annual financial statements and provide other permissible non-audit and tax-related services for the company. The company and the audit committee have considered whether the non-audit services provided by BDO Seidman are compatible with maintaining the independence of BDO Seidman in its audit of the company and are not considered prohibited services under the Sarbanes-Oxley Act of 2002.

Audit Fees. In fiscal 2008, the professional services of BDO Seidman totaled $2,756,740 for the audit of the company’s annual financial statements, for reviews of the company’s financial statements included in the company’s quarterly reports on Form 10-Q filed with the SEC, audit-related consultation concerning financial accounting and reporting standards and for the audit of the company’s internal control over financial reporting.

Included in the fiscal 2008 fees were $275,048 of non-recurring audit charges related to the Micromania acquisition.

In fiscal 2007, the professional services of BDO Seidman totaled $2,128,511 for the audit of the Company’s annual financial statements, for reviews of the Company’s financial statements included in the Company’s quarterly reports on Form 10-Q filed with the SEC, audit-related consultation concerning financial accounting and reporting standards and for the audit of the Company’s internal control over financial reporting.

Audit-Related Fees. In fiscal 2008 and fiscal 2007, the Company paid BDO Seidman $25,000 and $31,000, respectively, for services in respect of employee benefit plan audits.

Tax Fees. In fiscal 2008, the Company paid BDO Seidman $67,600 for tax-related services. In fiscal 2007, the Company paid BDO Seidman $207,076 for tax-related services. Tax-related services included professional services rendered for tax compliance, tax advice and tax planning.

All Other Fees. The Company did not pay BDO Seidman any other fees in fiscal 2008 or fiscal 2007.

Pre-approval Policies and Procedures. The audit committee charter adopted by the Board of Directors of the company requires that, among other things, the audit committee pre-approve the rendering by the company’s independent auditor of all audit and permissible non-audit services. Accordingly, as part of its policies and procedures, the audit committee considers and pre-approves any such audit and permissible non-audit services on a case-by-case basis. The audit committee approved all of the services provided by BDO Seidman referred to in this report.

Investment Thoughts

The stock is on the Wax Ink Watch List with a Reasonable Value Estimate of $65.00, a Buy Target of $32.50, a First Sell Target of $63.37, and a Close Target of $68.60, based on a five (5) year hold.

For fiscal 2009 while the current consensus for earnings growth is 12%, we believe that due to the current world economic malaise, earnings will decline approximately 15%.

In addition, we note that of the company's $4.52 billion in Total Assets, almost 47% is made up of Goodwill and Intangibles, which to us is the same thing as saying ketchup makes good soup. We also note that the company paid Specail Income Charges of $6.9 million during fiscal 2008.

The company touted in its 10-K filing that it had purchased French company Micromania SAS SAS, and that it had funded the purchase with its credit facility and term loans, all of which were fully repaid during fiscal 2008. Certainly we are always impressed when a company pays down or pays off its debt, and with GameStop there is no exception, we were very pleased that the company was able to fund the purchase of Micromania SAS with borrowings and repay those borrowings promptly.

What we are now wondering is, going forward, what is the plan to pay off the remaining $545.7 million in debt list on the company's books. At first glance we could not understand why the company continued to pay interest, $50.5 million in fiscal 2008, on loans that its Free Cash Flow, $790 million in fiscal 2008, would easily pay off.

However, once we looked a bit further, we found that the company spent $630.7 million during fiscal 2008 on Acquisitions, reducing the company's available Free Cash Flow from $4.71 per share to $0.95 per share.

We note that based on a recent close $23.89, the company has a trailing twelve month PE of 8.18, a Tangible Book value of $1.13 per share and Shareholder Equity of $13.71 per share, all of which should be pointing towards taking a position in the stock.

Yet we see no movement on the part of management to establish a plan to make the company debt free, or to start paying dividends.

Admittedly, dividends are way down the list for us when it comes to investment consideration, but when we encounter a financial statement like the company's, where acquisitions seem to be unplanned, and where no consideration could be found on the part of management for the state of the world economy, we happen to believe a little something something is in order for the common shareholder, and to us, dividends are what that little something something should be.

While we like the company over the very long term, it is our opinion that there is increased risk over the short-term, and since we believe in being well compensated for the risks we are willing to take, we have lowered our Buy Target from $32.50 to $15.00.


GameStop Corporation Worksheet 0109  [more]

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