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K12, Inc. Message Board

  • Claim_Digger Claim_Digger Nov 9, 2010 11:01 AM Flag

    1Q Results

    It is not surprising that the stock is being hammered today given the earnings miss this quarter (0.07 versus and estimated 0.29). Short term traders often look at the superficial numbers rather than the underlying story. And that underlying story is still intact.

    First, the revenue was 134M or 27% higher than last year Q1. They also forecast that revenue for 2011 would be about $500M or 30% higher than in 2010 even without the revenue from AEC.

    The real reason for the earnings decline is the one time charges for acquisitions, restructuring and various initiative. K12 should have itemized those numbers in their earnings release instead of lumping them altogether in G&A and S&M. The sharp jump in operating costs from 33M to 50M versus Q1 2010 is the main reason earnings were down as the gross margins held up fairly well. It is not clear how much of the jump was due to these non-recurring costs but if it were $10M then the EPS would have been 0.40 and the price would have been soaring. I doubt if the analysts who put out the 0.29 estimate included those costs.

    The initiatives including the Middlebury language program are going to take some time to become profitable. They need investment before they do. The acquisitions will also need time before they become accretive.

    The underlying value of the company get best be seen by the estimate for EBIDTA going forward. $85M without the charges for 2011 is an increase of 39% over 2010. So with revenue growth of 30% going forward and EBIDTA growth of 39% going forward the stock still takes a 10% haircut? Such are the ways of the short term traders.

    K12's business model is on track and short term noise is not going to derail it. Student growth is strong, overseas markets have great potential, competition is either being acquired or is falling away, higher revenues are being leveraged and the company is starting to dominate its space. Even the political (more cost effective charter schools to save education budgets) and social (more homeschoolers) trends are in their favor. I feel very comfortable holding K12 and expect it to be a multi-billion market cap company within the next few years.

    CD

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