UNIVERSITY OF OREGON
INVESTMENT GROUP
4-30-2010
Consumer Goods
Rosetta Stone Inc.
RECOMMENDATION: BUY
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap(M)
Current Price
Valuation (per share)
DCF Analysis
Comparables Analysis
Current Price
Target Price
$16.06- 32.97
RST / NYSE
.65
19.9
287,505
$569
$26.25
$31.88 (50% weight)
$37.10 (50%)
$26.25
$34.49
Summary Financials
2009A ($M)
Revenue
Net Income
Operating Cash Flow
$252
$13.4
$41.1
CORPORATE SUMMARY
Rosetta Stone Inc. (RST) joined the public markets in the spring of 2009. As of the end of their fiscal year 2009 they
reported $252 million in sales, while also growing profits at 54 percent year over year. The company’s goal is to create
a program that surrounds their customers directly with the language, without translation. Their proprietary teaching
method called Dynamic Immersion has been the key driver for the company’s recent growth. They offer courses in 31
languages to a large customer base, ranging from government officials to armed forces. RST has offices in Virginia,
London, Tokyo, Colorado and other various locations around the world. The focus point going forward is to keep up
with growing international demand whiling continuing to enhance their proprietary curriculum.
Covering Analyst: Matthew Hollands
Email: Mhollan1@uoegon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
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addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG’s portfolio.
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The products offered are available in four versions that use the standard learning model but are tailored specific to the
customer’s preference.
The personal edition is for those who are looking to pick up a language on their own time and convenience.
These normally appear for purchases at kiosks, retailer stores and or online to be used in the home.
Schools that are looking for assistance with teaching their curriculum can purchase the classroom edition. For
those who are teaching the language can use the tools offered in this edition to create track record for
students as well as helpful activities, guidance to enhance the process, and detailed lesson plans.
Families who use their home as a means for education are offered a targeted course that enhances lesson
planning. Parents can create a formal language learning environment with ease. The Home School Edition
provides similar functionalities as the classroom.
Corporations who are need of language support for international activities can supply their employees with a
convenient, user friendly platform that gives them total control of their learning experience.
The latest data in the 10k shows that 87 percent of their sales were CD-ROM based purchases while the remaining 13
percent came from online subscriptions. The chart above shows the recent growth by the company, both domestically
and internationally. This trend is set to continue for the next 3-4 years as expansion efforts and global demand pick
up.
BUSINESS AND GROWTH STRATEGIES
RST has been able to generate quarter over
quarter double digit growth because of several
factors:
Advancements in proprietary learning
software
Increased market demand
Versatile curriculum that can be
translated across many languages.
Cost-effective product portfolio.
The aforementioned determinates could not be achieved without the company’s ability to utilize their marketing and
operational channels. Using retailers such AMZN, AAPL and BKS customers are targeted directly. This coupled with
radio, T.V. and other mediums, has created strong brand recognition for the company. Studies from various research
firms show that RST’s investments into marketing and S&GA has create nearly 80 percent brand awareness and has
confirmed that Rosetta Stone is the most recognized language learning brand in the US (data from SP500 and 10k
report).
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A little more than 90 percent of the business’ top line figures
came from customers in the US during fiscal year 2009.
Market research suggests that the market of the language
learning industry is around $85 billion dollars of total
consumer spending. It further suggests that demand is fueled
by consumer’s preferences shifting towards increased taste for
language learning. Consistently developing the language
platform and increasing the accessibility of it will keep top line
growth in the 12-14 percent range for the next three years. Users have shifted towards interactive platforms as a
means of performing activities. Worldwide growth for using computers as a teaching tool has exploded in recent
years. Its projected that there will be nearly 1 billion personal computers in use within the next few years. Strong
demand will continue to pick up for the company because of consumers preferences shifting to at home education,
away from conventional classroom setting.
RST has various product developments slated to hit the market within the next few quarters. Management has stated
that investors can expect to see product launches similar to that of their midsummer introduction of TOTALe. This
edition is a web-based upgrade that gives clients the opportunity to be instructed by professionals over the internet.
Customers also have a chance to interact with other users to play games and practice the language. Upgrades in the
level of language proficiencies will continue to occur as the company strives to supply their customers with a wide
range of languages and levels.
The company will seek bottom line growth by implementing various cost-effective strategies in their operations.
Examples of these include using third-party manufactures to construct and package their product. In the past this has
equated into reduction in costs and increases in capacity. To handle the roughly 8% of sales overseas, the company
has firms in Munich, Tokyo, and Neverthlands. They will continue to expand operations overseas in order to increase
sales growth while cutting down on operational expenses.
RECENT NEWS
Rosetta Stone looks to growth outside U.S. – 4-13-2010- Reuters New
An article by Reuters touched on major business model changes that look to boost RST sales growth. The article
names Brazil and Italy as possible areas of growth. The goal is to have international revenue account for 50% of total
revenue within the next 4-5 years. As of fiscal year 2009 international sales accounted for around 8%. The cash on the
company’s balance sheet will be used to accomplish these goals. The company will use debt as a last resort when it
comes to financing expansions.
China has been hindering RST from entering the market. The concern is the “lack of respect for intellectual property
rights” China has. To combat such challenges, the company will continue to push the expansion of their current
product line by introducing upgrades. The company is looking to launch its 4 th edition of its popular software, which
can be used on the iphone.
Rosetta Stone launches higher-education program – 3-24-2010- Virginia Business
RST just announced an upgrade to their higher-education program that allows teacher to supplement class time with
online learning. Students now have the ability to read, write, listen, and speak the language while being taught by a
native speaker. This allows for fluid learning and different aspects of studying the language to emerge. This type of
learning is set to launch at Universities and other colleges in the next few years.
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Consumer Sentiment: Actions Speak Louder Than Words- 2-26-210 - IndieResearch
RST reported that its Q4 profit more than doubled due to strong demand. Net income for the three months ended
December 31st was $12.2 million, or 58 cents a share, up from $4.9 million, or 29 cents a share, last year. Adjusted
EPS was 61 cents, easily topping the 38-cent consensus. Revenue climbed 18% to $78.3 million, also beating analyst
expectations of $74.3 million. Looking forward, the company expects Q1 adjusted EPS of 7-9 cents on revenue of
$58-$60 million versus the consensus of 12 cents on revenue of $56.2 million. For the full year, adjusted EPS is
expected to be 90 cents to $1.00 on revenue of $286-$299 million compared to the analyst estimate of $1.16 on
revenue of $279.6 million.
INDUSTRY
Rosetta Stone and its main competitors operate in the Software Publishing segment of the US. Business operations
include distribution, publishing, and designing computer programs. Mass production within this industry usually
occurs through 3rd party partnerships. This
helps create a cost effective means of
developing a product. IBISWorld lists the main
functions of the industry on the graph to the
right.
Technological innovation and development is a
key component of the success of this industry.
Growth is likely to surpass historic levels within
this industry due to R&D investments as well as
falling hardware and software prices. As the
global economies continue to rebound, the
demand for such products is likely to reach
historic growth through 2015. Macroeconomic
fluctuations like rising unemployment and lower consumer spending can have adverse effects companies operations.
As consumers continue to make investments in computers and software, demand will increase at healthy rates (near
double digits). Market research provides projected investments into such activities for the next six years. The
information suggests this trend is likely to keep RST at the forefront of language learning software. Computers are
able to handle more data than ever and while at the same time operating at a faster pace. The costs during this time
period have been decreasing. This has
increased the affordability of products
within
the
industry.
Growth
internationally is likely to be sustained
around 6-7% for the next five years, with
a bulk of the growth coming from
emerging markets.
In order to gain market share, businesses
must continue to focus on strategies and
decisions based on market demand
determinates.
Introducing
new
application platforms that improve
customer
service,
profitability,
marketing, and cost cutting management decisions give corporations opportunities to expand at record rates. These
new product offerings serve as a driver for margin growth and continued reoccurring revenue. Software companies
work to do this by creating new editions and upgrades to current product lines. Within the next few years larger
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players in the market may be able to achieve operating income margins of 36-38 percent. The typical households
buying decisions are directly tied to disposable incomes. As economic conditions strength major growth is likely to
continue. As the World Wide Web becomes more readily available to other nations, growth for software related
products will expand. Designers and distributors will push to make it easier for consumers to buy such products. This
will equate to higher levels.
Companies like RST strive for scucess in the global environment by reaching customers in an affordable fashion. To
grow profitability in the double digits, businesses must be able to expand international sales while lowering SG&A and
marketing expenses. Language learning programs require a strong brand name in order to survive. This can be
achieved through brand position and
increases in customer services. Firms
must be willing to set up offices closer
to their customers in order to
effectively create a strong relationship.
You may see slight increases in
business marketing and or sales
expenses if a company tries to push for
stronger market recognition.
The graph to the left shows how the
current revenue segmentation is
broken down within the industry.
System software publishing and
Application software publishing will
continue to represent a large portion
S.W.O.T. ANALYSIS
Strengths
Advanced proprietary programming that effectively teaches users the language of choice in an interactive
fashion
Language learning software that can be easily and cost effectively used throughout many nations and
translations
Leading brand awareness, customer loyalty, and highest product positioning
Weaknesses
Nearly all revenue is derived from one type of revenue stream- language learning solutions
Current business model is tailored heavily to economic conditions in the US (nearly 92 percent of revenue
comes from US).
Opportunities
Large market demand for learning language solutions both internationally and domestically
Projected that $82 billion of consumer spending will be on language learning products
Market for interactive language learning programs is relatively new with large growth potentials
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Threats
Prolonged global recession that effects disposable income and unemployment negatively
Consumer preferences change substantially
COMPARABLES ANALYSIS
For selecting my comparable companies I used numerous scanning programs to base the businesses on specific
criteria. It was especially important to evaluate risk, both from a market perspective (i.e. industry risks) and financial
structure. The reason behind this was that the conventional method for deriving a beta (5 year, monthly regression)
wasn’t possible because RST went public a little over a year ago. Thus I needed strong comparable companies in order
derive an implied price (using enterprise metrics) and industry beta (Humada). The companies are all equity financed
and have strong balance (quick ratios generally above 1.2 and strong cash positions). They have exposure to learning
solution programs and face similar demand determinates. All though some had either stronger or weaker historic
revenue growth, going forward the comparables will grow between 12-20 percent year over year for the next 3-5 years.
The LTM gross margin percent, net income, and EBITDA for my comparables are approximately 72, 14, and 9
respectively. RST came in at 86, 8.5, and 5.3 respectively. As previously mentioned, these rates converge together in
the next few years to similar growth rates as RST. Business descriptions and activities are described below by FactSet.
I used four metrics to derive an implied price for Rosetta Stone Inc.: EV/Revenue, EV/Gross Profit, EV/EBITDA,
and EV/OCF. Enterprise value (EV) over revenue is a measurement for how well a company produces revenue
relative to its takeover value and it’s fundamentally affected by how good a company’s margins, growth, and risk are.
Since the companies share future risks, growth, etc this was weighted at 30 percent. The metrics for finding how well
cash flow is produced relative to the size of the firm was EV/EBITDA. Similarly I wanted a metric to estimate how
well a company produces operational cash flows relative to their enterprise (over OCF). To see how well the
companies compare based on their effectiveness of COGS management is relative to their firm’s size, I used
EV/Gross profit.
Renaissance Learning Inc (NASDAQ Stock Market: RLRN)- 30% Weight
Renaissance Learning, Inc. is a provider of computer-based assessment
technology for pre-kindergarten through senior high (pre-K-12) schools and
districts. The Company’s tools provide daily formative assessment and
periodic progress-monitoring technology to enhance core curriculum,
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support differentiated instruction, and personalize practice in reading, writing, and math. Its products and services are
primarily focused on three key pre-K-12 curriculum areas: reading, writing, and math. Accelerated Reader, STAR
Reading, STAR Early Literacy, Successful Reader, and Read Now Power Up! comprise its reading products. Its math
products include Accelerated Math, STAR Math, and Math Facts in a Flash. NEO laptops and related software are its
primary writing and keyboarding products. It also addresses language acquisition for English language learners with its
English in a Flash software. Its 2Know! response system is a classroom tool.
Scientific Learning Corp. (NASDAQ Stock Market: SCIL) -15%
Scientific Learning Corporation develops, distributes the Fast ForWord family of
software. The Company creates educational software that accelerates learning by
improving the processing efficiency of the brain. Its products are marketed primarily
to K-12 schools. The Company’s products are marketed in 45 countries globally. It offers an online data analysis and
reporting tool that uses algorithms to provide diagnostic and prescriptive information and intervention strategies. The
Company provides a variety of on-site, Web-based and telephone-based services and support. During the year ended
December 31, 2009, the K-12 sector accounted for 90% of the net sales of the Company. During 2009, the sale were
concentrated in K-12 schools in the United States, and accounted nearly 117,000 schools serving approximately 56
million students.
Art Technology Group, Inc. (NASDAQ Stock Market: ARTG) – 25%
Art Technology Group, Inc. (ATG) develops and markets a suite of e-commerce software
products. ATG Commerce is an e-commerce platform and set of e-commerce applications, which
the Company delivers through perpetual software licenses, software as a service (SaaS) or on a
managed services basis. Its optimization services include Click-to-Call, Click-to-Chat, Call Tracking
and ATG Recommendations services. The Company sells its products primarily through its direct
sales organization. ATG Partners include global systems integrators, such as Accenture, Acquity Group, Capgemini,
CGI, Deloitte Consulting, Infosys and Sapient, as well as regional systems integrators and interactive agencies, such as
Aaxis Group, Empathy Lab, LBi Group, Professional Access, Razorfish and Resource Interactive. On January 8,
2010, the Company acquired InstantService.com, Inc.
Universal Technical Institute, Inc. (NYSE: UTI) 30%
Universal Technical Institute, Inc. is a provider of postsecondary education for students
seeking careers as professional automotive, diesel, collision repair, motorcycle and marine
technicians as measured by total average undergraduate enrollment and graduates. It offer
undergraduate degree, diploma and certificate programs at 10 campuses across the United
States under the banner of brands, including Universal Technical Institute (UTI),
Motorcycle Mechanics Institute and Marine Mechanics Institute (collectively, MMI) and NASCAR Technical Institute
(NTI). The Company also offer manufacturer-specific training programs including both student paid electives at the
campuses and manufacturer or dealer sponsored training at dedicated training centers. As of September 30, 2009, the
average undergraduate enrollment was 15,854 full-time students.
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DISCOUNTED CASH FLOW ANALYSIS
Revenue
Revenues are based on the percent of growth model. I took into account the following information to project future
sales (some of the data for how growth was forecasted is available in the appendixes):
Revenue from sales channels (direct-to-consumer, Kiosk, Retail)
International expansion
Product & service revenue growth rates (both historic and projected)
A list of how revenue is broken
down is provided to the right. The
company going forward will look to
boost top line growth by increasing
their
customer
base
(both
domestically and internationally)
through marketing, sales force, and
securing more distribution channels.
The latter is going to be a key driver
for RST within the next few quarters
as they bring to market higher
margin offerings and upgrades.
Securing channels through retailers
and online (direct-to-consumer) will be especially important for them while they look overseas for growth and
consumer preferences change. The company will look to generate margin growth through cost management activities.
This can occur in trimming marketing, development in production, and creating means for effective sales.
Rosetta Stone will continue to leverage its business to its bread and butter product line, Language Learning Solutions.
Upgrades and higher margin versions of their products will help them grow at near historic rates. Growth 2-3 years
out is indicative of international expansion and economic rebounds. This coupled with lowered costs to operations
will allow the company to growth at double digit rates for the next 5 years. For the nearer term forecasted years I went
with CEO guidance, analyst, and numerous research reports.
Gross Margin
The company seeks to slowly grow top line margins at around 20-50 bbps average for the next coming years. They
plan to accomplish this by lowering expenses. They plan to allocate capital and company resources in a way that
facilitates the improvement of technology in the management of processing, inventory, and distribution channels. The
COGS for expanding overseas should have material effects on gross margins as it’s easy for the proprietary
information to be translated into several other languages.
EBIT Margins
In order to keep on top of their proprietary software and technology leadership, growth in the R&D is necessary. This
will be especially important as expansion overseas and consumer demand picks up. You will see low upticks in R&D
as this occurs. In the past this has enhance how subscribers and customers interact in the learning program. Some of
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the new advancements can be seen in the company allowing users to join online chats with native speakers.
Improvements in distribution are also aided by capital fusions into R&D. By utilizing the development of their
technology they will continue to grow faster than their competition and stay the leader in this niche market. Whether
you watch TV, listen to the radio, shop at the mall, or search online you have more times than not seen the yellow box
in which RST’s software comes in. Although not as big of a factor going forward, the company’s marketing scheme
has helped fuel large growth for them. Management has stated that the marketing mix will shift based on how well
revenues and brand awareness continues to expand.
Operational Cash Flow (NI + D/A + Interest Expense)
Net income is projected based on the revenue projections and the margins above. Depreciation and amortization is
projected based on management, analyst estimates, and the expansion of acquisitions/ CAPEX. Interest Expense was
kept constant.
Assumptions
Beta- Looking at the appendixes you can see that I conducted a Hamada beta based on my comparables and a
selection of industry related companies given by FactSet and SP500 compustat report. The Hamada resulted in a beta of
.65. This seems reasonable given the nature of the industry and the current positions of its balance sheets (see NWC
in the appendix).
Cash- Cash wasn’t added into the equity value because the CEO has stated it will be used for acquisitions (CAPEX)
within the next 2-3 years.
RECOMMENDATION
I am recommending a buy for all portfolios’s based on Rosetta Stone’s implied value being greater than its current
market price. The report shows both the quantitative and qualitative information that went into the valuation.
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APPENDIX 1 – COMPARABLES ANALYSIS
In Millions
RST
Price
Shares Outstanding (MRQ/Diluted)
Total Debt (MRQ)
Enterprise Value
Revenue (TTM)
Gross Profit(TTM)
EBIT (TTM)
EBITDA (TTM)
Net Income (TTM)
OCF (TTM)
Beta
D/E
Cash
Quick Ratio
RLRN
0
95
1.1
30.00%
15.9
29.9
0
436.41
121.5
96.1
31
33.6
19.9
34.3
1.1
0
39.5
1.15
SCIL
15.00%
5.2
18.7
0
77.24
55
43.7
5.3
7.2
4.8
14.5
0.7
0
20
1.15
ARTG
25.00%
4.59
133
0
610.47
179.4
118
16.8
26
16.8
30.2
1.2
0
79
1.62
UTI
30.00%
24.71
24.6
0
607.866
366
82.9
19.4
37
11.7
49.2
0.8
0
81
1.1
1.70
1.96
16.35
10.36
3.59
4.54
12.99
12.72
1.40
1.77
10.73
5.33
3.40
5.17
23.48
20.21
1.66
7.33
16.43
12.36
26.25
20
0
430
252
219
21
26
13
41.5
Multiples
EV/Revenue
EV/Gross Profit
EV/EBITDA
EV/OCF
Weighted Average Implied Price Weighted Average
2.64
38.02
30.0%
4.15
50.20
30.0%
16.30
26.19
30.0%
13.38
27.76
10.0%
Implied Price
37.10
Current Price
26.25
Undervalued
41.3%
*SCIL’s Gross Margin was thrown out in the weighted average
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APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS
1
(In Millions)
Net Revenue
2007
137
% Growth
COGS(incl. D&A)
2008
2009 2010E
2
2011E
3
2012E
4
2013E
5
2014E
6
2015E
7
2016E
8
2017E
9
2018E
10
2019E
209
252
295
348
418
481
529
571
600
618
636
655
52.5%
20.5%
17.0%
18.0%
20.0%
15.0%
10.0%
8.0%
5.0%
3.0%
3.0%
3.0%
24
32
33
38
45
52
60
65
69
72
74
76
79
%Revenue
Gross Profit
Gross Margin
Operating Expenses
SG&A
%Revenue
R&D
%Revenue
Other Operating Expense
%Revenue
Non-Operating Income (expense)
%Revenue
Operating income
Operating Margin
Non-Operating Items
Interest Expense
% Revenue
Pretax Income
Total Income Taxes
Tax Rate
Net Income
Net Margin
EPS
18%
113
82.3%
15%
178
84.9%
13%
219
86.8%
13%
257
87.0%
13%
304
87.2%
13%
366
87.5%
13%
421
87.5%
12%
464
87.7%
12%
503
88.0%
12%
528
88.0%
12%
543
88.0%
12%
560
88.0%
12%
577
88.0%
92
66.7%
13
9.40%
0
0%
0.90
0.7%
9.4
6.8%
130
62.1%
18
8.79%
2
1%
0.70
0.3%
28.2
13.5%
172
68.2%
26
10.38%
0
0%
0.30
0.1%
20.9
8.3%
198
67.0%
30
10%
233
67.0%
35
10%
282
67.5%
46
11%
312
65.0%
58
12%
344
65.0%
63
12%
371
65.0%
57
10%
390
65.0%
48
8%
401
65.0%
31
5%
413
65.0%
32
5%
426
65.0%
33
5%
29.5
10.0%
35.5
10.2%
37.6
9.0%
50.5
10.5%
56.6
10.7%
74.2
13.0%
89.9
15.0%
111.2
18.0%
114.5
18.0%
117.9
18.0%
1.3
0.9%
8
5
66.7%
3
2.0%
0.9
0.4%
27
13
49.1%
14
6.6%
0.4
0.2%
21
7
34.6%
13
5.3%
Add Back: Deprec. & Amort.
% Revenue
Add Back: Interest expense*(1-tax rate)
Cash From Operations
% Revenue
Current Assets
% Revenue
Current Liabilities
% Revenue
Net Working Capital
Change in Networking Capital
Cap EX
% Revenue
Free Cash Flow
8
5.7%
1.3
12
8.6%
43
31.0%
36
26.5%
6
$
10
7.1%
2
7
3.3%
0.9
22
10.4%
109
52.2%
48
22.7%
62
56
7
3.3%
-41
5
2.1%
0.4
19
7.6%
155
61.5%
66
26.2%
89
27
9
3.4%
-16
PV of FCF
0
0
0.0%
0.0%
30
36
10
12
35.0%
35.0%
19
23
6.5%
6.6%
0.96 $ 1.15 $
0
0.0%
38
13
35.0%
24
5.8%
1.22 $
0
0.0%
50
18
35.0%
33
6.8%
1.64 $
0
0.0%
57
20
35.0%
37
7.0%
1.84 $
0
0.0%
74
26
35.0%
48
8.5%
2.41 $
0
0.0%
90
31
35.0%
58
9.8%
2.92 $
0
0.0%
111
39
35.0%
72
11.7%
3.61 $
0
0.0%
115
40
35.0%
74
11.7%
3.72 $
0
0.0%
118
41
35.0%
77
11.7%
3.83
9
3.0%
0
28
9.5%
183
62.0%
77
26.0%
106
17
10
3.5%
0
0
17
4.0%
0
41
9.8%
230
55.0%
109
26.0%
121
10
19
4.5%
13
10
20
4.2%
0
53
11.0%
240
50.0%
125
26.0%
115
-6
20
4.2%
39
28
16
3.0%
0
53
10.0%
291
55.0%
137
26.0%
153
38
21
4.0%
-6
-4
14
2.5%
0
63
11.0%
314
55.0%
148
26.0%
166
12
17
3.0%
33
21
12
2.0%
0
70
11.8%
360
60.0%
156
26.0%
204
38
15
2.5%
17
10
6
1.0%
0
78
12.7%
371
60.0%
161
26.0%
210
6
15
2.5%
57
30
6
1.0%
0
81
12.7%
382
60.0%
165
26.0%
216
6
13
2.0%
62
30
7
1.0%
0
83
12.7%
393
60.0%
170
26.0%
223
6
13
2.0%
64
29
12
3.5%
0
35
10.1%
202
58.0%
91
26.0%
111
5
16
4.5%
14
12
11
Rosetta Stone Inc.
university of oreg on investment g roup
http://uoig.uoregon.edu
APPENDIX 3 – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
Risk-Free Rate
Beta
3.69% Equity Cost of Capital
0.65 Equity Weighting
7% Tax Rate
3.0% Debt Weighting
Risk Premium
Terminal Growth Rate
8.24%
100%
35%
0%
0.0%
8.24%
Cost of Debt
95 WACC
0
20
525 ∑ PV of FCF's
Cash
Long-term-debt
Shares Outstanding (Dil)
Enterprise Value
166
Terminal Value
PV of Terminal Value
Firm Value
Equity Value
Implied Price
Current Price
(Undervauled)/Over
1,251
567
733
638
31.88
26.25
-17.7%
APPENDIX 4 – BETA
Company
Ticker
Software Programing & Education Industry
Renaissance Learning Inc.
RLRN
Scientific Learning Corp.
SCIL
Art Technology Group Inc.
ARTG
Universal Technical Institute Inc
UTI
Corinthian Colleges Inc.
COCO
Lincoln Educational Services Corporation
LINC
ITT Educational Services Inc.
ESI
Career Education Corp.
CECO
Mean
Median
Tax Rate
RST D/E
35.0%
0.0
Unlevered Beta
0.656
Beta
SE
D/E
1.100
0.700
1.100
0.800
0.250
0.450
0.219
0.630
0.100
0.119
0.144
0.112
0.134
0.101
0.134
0.145
0.000
0.000
0.000
0.000
0.002
0.200
0.800
0.007
0.656
0.700
0.124
0.119
0.126
0.000
12
Rosetta Stone Inc.
university of oreg on investment g roup
http://uoig.uoregon.edu
Beta
Implied Value
Valued
54.62
32.62
0.526
41.35
-51.00%
-35.00%
Beta Sensitivity Analysis SE= .124
0.65
31.88
-17.00%
0.774
25.7
0.898
12.4
2.00%
25.00%
APPENDIX 5 – NWC
2007
22.1
52%
2008
69.1
212.7%
63%
2009
95.2
37.8%
61%
42.6
31%
11.9
27.9%
3.9
9.2%
4.7
109.4
52%
26.5
24.2%
4.9
4.5%
8.9
155.1
61%
37.4
24.1%
9
5.8%
13.5
36.4
27%
47.5
23%
30%
0
66.1
26%
39%
0
Cash & Short-term Investment
Percent Growth
Percent of Total asset
Total Current Assets
%Revenue
A/R
Percent of CA
Inventories
Percent of CA
Other Current Assets
Total Current Liabilities
%Revenue
%Growth
ST Debt and Current of LT
Percent of TCL
Accounts Payable
Percent of TCL
Income Tax Payable
Percent of TCL
Other Current Liabilities
Percent of TCL
3.4
13%
0%
4.6
17%
1.5
6%
26.9
74%
0%
3.2
8%
2.9
7%
41.4
87%
1.6
3%
6.2
11%
58.3
88%
APPENDIX 6 – SOURCES
FACTSET
IBIS
RST 10k (2009)
Fidelity
Schwab
S&P 500
13