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Corporate Executive Board: Where ‘C-Level’ Management Gets Advice and Research to Help Make Business More Efficient

September 24, 2006 | About:
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Stuart Schaeffer

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The Corporate Executive Board (Nasdaq: EXBD) generates over $400 million/year and operates in the consulting industry. EXBD was spun off from a company called the Advisory Board in 1997. EXBD isn’t just any old consulting company though. EXBD is dramatically different than that what investors traditionally think are consulting companies: namely Accenture (ACN), Computer Sciences Corp. (CSC) or Electronic Data Services (EDS).

EXBD provides research, best practices guidance, and administrative education to C-level (Chief Executive Officers, Chief Operating Officers, Chief Financial Officers, Chief Information Officers, Chief Technology Officers and others) upper-level managers.

Through services as varied as best practices solutions, research studies, seminars and C-level support tools, EXBD enables upper-level management to make more informed and better decisions in areas of business as varied as Financial Services, Human Resources, Strategy/R&D, Sales and Marketing, Information Technology, Corporate Finance, Legal/Administrative, Operations/Procurement, and Corporate Communications.

Essentially EXBD is an executive network where upper-level management of other companies meet with EXBD’s consultants to discuss – and solve – the biggest business problems, issues, and concerns that upper-level management has.

EXBD has one of the most defendable and sustainable moats that I’ve seen a business have in recent years. With its vast expertise in virtually every area that management would be interested in making more efficient, EXBD has a firm lock on the business of helping upper level management make their organizations’ more efficient.

For example, if a Chief Operation Officer is trying to make his procurement strategy more efficient, why should he attempt to design his own structure when he can go to the EXBD and ask them ‘what is the best way to design a procurement strategy for my business?’ EXBD would then be able to use past research, studies and best practices analysis to help the COO design this efficient procurement strategy.

Using EXBD’s services would save the COO time, effort, and give his company a leg up on the competition that is NOT using the EXBD’s services.

EXBD’s business model is sustainable and defendable since businesses are always trying to become more efficient. When EXBD successfully helps a clients increase sales or decrease expenses it validates and proves that EXBD’s services are value-added.

In addition, EXBD can count over 80% of the Fortune 500 as being current customers. This fact also leads EXBD to its next great growth story for EXBD. In coming years, EXBD has identified mid-size companies as potential customers. Just counting Standard & Poor’s madcap index, yields 400 more companies that EXBD can eventually sell its reports, studies, best-practices research and management education classes to in the near future. By addressing this untapped market and the tens of millions of dollars in revenue that these customers will generate, EXBD has virtually assured itself of being a growth stock well into the end of this decade.

Another interesting factor is that EXBD is located in Washington DC . That might not sound important, but it is because C-level managers need to network and talk with one another in order to remain current on industry trends and ideas. As such, by locating itself in the heart of the nation’s capitol, EXBD has centered itself magnificently at the nexus of business and networking interests. That is a fact that will never, ever show up on any balance sheet, income statement or cash flow statement. Without having perused an annual report or visiting the EXBD website, an investor would never have realized this fact.

Many of EXBD’s corporate statistics are dramatically better than other companies in its industry. For example, EXBD’s Sales (5-year annual average), Net Income (5-year annual average), Net Profit Margin (5-year average), and Return on Equity (5-year average) are noticeably higher than its competition and the S&P 500 as a whole. The chart below clearly highlights these statistics

Ratio

EXBD

Industry

S&P 500

Sales

30.6

9.5

11.4

Net Income

38.1

5.4

13.3

Net Profit Margin

18.9

5.5

10.9

Return on Equity

18.7

31.1

17.9

Statistics taken from MSN Money as of 9-17-06

To put these statistics into perspective, EXBD’s sales AND Net Income are more than double that of the S&P 500. It is amazing to see a company perform this well for this long – especially in light of the economy over the last 5 years.

Looking at these statistics easily leads an investor to realize that he/she is looking at a growth company – pure and simple. Further proof solidifies this conclusion: Over the last 8 years (since EXBD’s inception in 1997) EXBD’s compound annual growth rate for Sales has been 27.2%, for Net Income it has been 47.8%, for Book Value per share it has been 57.8% and for Cash Flow Per share it has been 26%.

What strikes me though as being singularly important is EXBD’s Book Value and the fact that it has compounded at an annual rate of over 50% per year. This means that EXBD is not only growing the company, but creating wealth for its shareholders. Since inception the company has been profitable (which, in and of itself is notable), but when profits are divided by shareholders equity, a metric called Return on Equity results. Return on Equity essentially shows how the company is using shareholders’ assets with respect to profits and is an indicator of corporate profitability. Companies that can historically manage ROE over 15% are considered to be well managed and shareholder friendly.

Outlook and Valuation

Since inception, EXBD’s share price has increased from roughly $11/share to a high (in 2006) of $113/share. This translates into a yearly compound annual growth rate of over 33%. That is amazing growth – which means that investors could have potentially made over 10 times their investment. Interestingly, over the last several months, EXBD’s shares have dropped to the high 80’s. Furthermore, EXBD’s p/e ratio has historically been in the low 40’s – which is very, very high by virtually all investors’ standards. EXBD’s p/e ratio should be seen in the light of the growth that was previously discussed though.

The essential question for current investors, is “can EXBD continue to grow” such that it can support its still high (on an absolute scale) share price of over $85/share? In addition, can the company’s future growth prospects support a current p/e ratio of 47? That is the crux of the issue.

Based on my proprietary valuation technique – which has been extensively tested back to 1992 – EXBD is fairly valued. Specifically, EXBD is trading at 110% of its recent valuation – indicating that it is well within in the historical range where its shares have traded over the last half decade. As such, EXBD is a hold at current prices, but when if its shares hit the low 70’s, it would become a strong buy. Conversely, if EXBD’s shares were to hit the low 120’s it would become a strong sell.

Stuart A. Schaeffer, MLS

Corporate Executive Board has Operations in the following practice areas :

Financial Services (Banking, Financial Competition, Insurance, Operations, Retirement, and VIP),

Human Resources (Benefits, Compensation, Corporate Leadership, Learning and Development, and Recruiting),

Strategy/R&D (Business Leadership, Corporate Strategy and Research & Technology), Sales and Marketing (Advertising and Marketing, Customer Contact, Market Research, Marketing Leadership and Sales),

Information Technology (Applications, CIO, Enterprise Architecture, Infrastructure, Information Risk and PMO),

Corporate Finance (Audit, CFO, Controller, Investor Relations, Shared Services, Tax Director and Treasury Leadership),

Legal and Administration (Compliance/Ethics, General Counsel and Real Estate), Operations and Procurement (Supply Chain and Procurement Strategy),

Corporate Communications (Communications)

About the author:

Stuart Schaeffer
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 4.0/5 (6 votes)

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