Using Veritas to Construct the "Per…

29-04-2017 Hits:84626 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:79093 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:78938 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:83426 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:79991 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:82298 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:53273 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:81302 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:81304 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:81110 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:86965 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:84982 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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A few have wondered about the utility of using DCF in our K12 analysis posted the other day (see The Long-biased Forensic Analysis is Now Available to the Public). In particular, a question was brought to me as follows: "Isn't WACC at 7.4% really low for doing the DCF? You can't really use CAPM, because the beta would be skewed somewhat because the company just isn't that old. Using the build up method, I'm coming up with a WACC in the 11% plus range. Which would then drive down the per share price."

I would like to take the time to explain our conservative methodology.

We agree that LRN has a relative short trading history (approximately 1 ½ years) which could possibly skew beta computations and the resulting cost of equity derived through CAPM model. However, alternative forms of estimating cost of capital including ‘bond yield plus risk premium' and ‘build-up' method could also be equally skewed. LRN does not have any public traded debt to compute bond yield for ‘bond yield plus risk premium' method, while the build-up method would also require several assumptions relating to company size premium, industry premium and company specific premium that would require subjective assumptions based on individual perception. As a result we had relied on the most widely used approach in the industry - the CAPM model which suggest a valuation of $30.7 per share (assuming WACC of 7.3%).

If we look at some of the relative valuation multiples, we can see that the company seems to be undervalued. For instance the Price Earnings Growth (PEG) of LRN is 0.31x compared with average PEG ratio of 0.78x for its peers (please see the relative valuation section in the financial model), suggesting that LRN is undervalued when P/E is adjusted for future earnings growth. The current PEG ratio of the company would imply 150% premium for LRN (which would suggest a valuation of $44 per share) while we had been conservative in our premium estimates with just 25% premium (valuation of $22) on P/E basis. EV/EBITDA based relative valuation approach is also implying a substantial upside for the company with a valuation of $29.5 which is close to valuation derived through DCF methodology ($30.7).  

Also we wanted to highlight that we have tried to be realistic (besides being conservative) in some of our other estimates including revenue growth, EBITDA margins and terminal growth rates that could possibly partially offset lower WACC used. We have assumed compounded annual revenue growth of 27.6% during 2008 and 2013 and average EBITDA margin of 13.3% (2008-2013) against management guidance of 25-30% for annual revenue growth and 18-20% EBITDA margins over the next five years. These assumptions are also on lower side compared with estimates of some of the leading analysts.  Also we had used terminal growth of just 3.0% in our estimates against terminal growth of 4.0% which could possibly be reasonable to take for virtual school industry. Had we used WACC of 10.4% and terminal growth of 4.0% with conservative margin assumption (base model), our valuation would have been $19.6 per share, while valuation would have been $36.5 had we used higher margins based on management guidance.

Sensitivity Analysis: (base model with EBITDA margins of 8-10%)

 

Terminal Growth Rates

WACC

       30.71

2.0%

2.5%

3.0%

3.5%

4.0%

6.9%

         29.1

         31.6

         34.8

         39.0

           44.5

6.4%

         32.6

         35.9

         40.2

         45.9

           54.0

7.4%

         26.2

         28.2

         30.7

         33.8

           37.8

8.4%

         21.8

         23.2

         24.8

         26.7

           29.0

9.4%

         18.7

         19.6

         20.7

         21.9

           23.4

 

10.4%

         16.3

         17.0

         17.7

         18.6

           19.6

 

Sensitivity Analysis: (EBITDA margins of 15-17%)

 

Terminal Growth Rates

WACC

       56.21

2.0%

2.5%

3.0%

3.5%

4.0%

6.9%

         53.2

         57.9

         63.8

         71.5

           81.7

6.4%

         59.7

         65.8

         73.7

         84.3

           99.2

7.4%

         47.9

         51.6

         56.2

         61.9

           69.3

8.4%

         39.8

         42.3

         45.2

         48.7

           53.0

9.4%

         34.0

         35.7

         37.7

         40.0

           42.7

 

10.4%

         29.6

         30.8

         32.2

         33.8

           35.6