Renaissance Learning, Inc. (NASDAQ:RLRN)

CAPS Rating: 4 out of 5

A provider of technology for personalizing reading, math and writing practice for pre-kindergarten through senior high schools and districts.

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Member Avatar ValueNAV (97.25) Submitted: 3/24/2008 6:25:50 AM : Underperform Start Price: $9.94 RLRN Score: -13.10

This stock has enormous downward pressure. It is significantly overvalued and conditions are getting worse. Renaissance could easily lose 70% of its lofty market value. This stock is terrible in terms of corporate governance and operating performance. Alternatively, for a great example of a company and a good investment, one should investigate Divestco (Toronto stock exchange DVT, DVTIF.PK).

Renaissance's metrics are far too high:
1) TEV/EBITDA is a startling 24.4
2) P/E (diluted) is unbelievably at 51
3) P/TangBV = 79

This is particularly so given it operating metrics (which have been unfailingly trending down year over year):
1) Revenue, EBITDA, and NI growth have been negative for 5 of the last 6 years
2) EBITDA margin, at 14%, in only 30% of what is was 5 yrs ago.
3) NI margin, at 7%, in only 30% of what is was 5 yrs ago.
4) ROA is 1/3 of what it was 2 yrs ago (if the trend continues, it will become negative in 2008)

Despite the poor performance, the 66% majority shareholders (Mr. & Mrs Paul) paid themselves a 380% dividend payout ratio in 2007 (similar payout in 2004). The dividend payout amounted to $30MM in 2007 and $70MM in 2004, this was in addition to their 1/2 million combined salary. Meanwhile, general investors had negative EPS growth every year of the last 5 years (-50% in 2006). The sept/05 share buyback decided primarily by Mr and Mrs Paul (CEO and Chairman) was a disastrous mistake costing $18/share.

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