Post edited 8:34 am – November 19, 2009 by Zefiro50
Hello All,
Here is a company I did a review on. PPD, a company that is currently number 1 in ROE in the Top 200 growth stock of 2009. I am also a member of their services. I think it might a great growth investment however I would like some opinions from you all before I decide to buy it.
Current Price: $41.13
DCF: Growth rate of 0% the DCF is 50.13
Growth rate of 7.88% which is P/E is 76.09
Grahams: 106.89
The DCF and Graham value above I would say are rather optimistic so I would be conservative and stick with a growth rate of 0% for now.
So far this is what I know about the company and the Pros and Cons in my opinion.
This company started back in 1972 as a Automobile accident legal service company that offset the cost of legal fees by having pool of members paying monthly fee for service per month. Since then, they now do business in canada and have identity theft protection as well in their portfolio of services for members as well as provide members access with attorneys of different specialization. They are the middle men when it comes down to matching people with attorneys.
Pros:
- Positive increase in Revenue and Operating income since 1999
- Positive increase in Free Cash Flow since 1999
- Treasury Repurchase of over 162 million dollars since 1999 and another 1 million shares buyback authorized in Febuary 2009.
- Been in business for over 37 years and the CEO has been with the company for 33 years.
- Return of Equity: 93% – Service company does not require much inventory, land, or other assets for business.
- They recognize only Metlife and GE Money company as their major competitors in their market.
Cons:
- Economic Moat? – Since this company only provides services, it does not require much to start in business. I am concern how well this company can stave off competitors who can enter in this field rather easily.
- Criteria for selecting their "Provider Law Firm" is atleast 2 years or other demonstration of being a lawyer. The quality of their lawyers are of entry level in my opinion.
- CEO compensation: The CEO gets paid an annual salary of about 400K a year. On top of that, he gets .25% of the membership revenue if it's 85% or more than last years same month. Also .25% of the membership revenue quarterly if that quarter is better than last years quarter. Overall made over 2.1 million dollars per year for the past 3 years as a CEO.
- He used about 11 hours of the corporate jet for personal use which he reimbursed.
- Reading the proxy statement, CEO only has about 8.2% stake in shares with the company
With a 50% margin of safety and a Growth rate of 7.8%, the discount buy price comes up to about 38 dollars for me.That is to say if this company continues to sign up new members every year which retaining current members and expanding into different geographic locations. This is rather optimistic and speculative but I think that really comes with a growth company.
I would like to hear your feedbacks for the follwoing.
- Economic Moat: This company has done very well for the past 10 years and has been in business for over 37 years. But is this enough to make the company continue to grow in the long term? It's a service company and the cost of start up in my opinion is not that much. It could be very easy for competitors to start up shop and eat away PPD's margins. Then again, PPD has 37 years of business and may have good ties with it's clients and "Provider Law Firms"
- CEO: I think the CEO gets paid way too much, unnecessarily uses the jet for personal purposes and has a very low stake in the company but he is doing a good of making the company profitable and bringing in free cashflow. Does this justify his large salary and behavior?
This is my first analysis so I could have made some mistakes. Please feel free to correct me on some of the information I have noted. It will be great to hear what you all think about this company.
Thanks.
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