Corporate Executive Board: Bad News = Good Price

Jun. 3.09 | About: CEB Inc. (CEB)

Corporate Executive Board [NDQ:EXBD] Jun. 2, 2009: $18.30
52-week range: $12.35 (Mar. 10, 2009) - $46.17 (Jun 5, 2008)
Dividend = $0.10 quarterly = 2.18% current yield

Company profile from MSN MoneyCentral:

The Corporate Executive Board provides companies with products and services designed to enable executives and professionals to deliver positive business outcomes. The Company delivers its products and services to a global network through annual, fixed-fee memberships. At December 31, 2008, its member network included executives and professionals from more than 50 countries and 5,100 institutions. The CEB member network is essential to its business.

2008 marked the first down year for EPS since EXBD’s Feb. 1999 IPO. Prior to that, this had been a premier growth company with EPS growing steadily from $0.42 in 1999 to a record $2.17 in 2007. That fine record was accompanied by ridiculously high multiples ranging from 29 – 50 times earnings over most of the past decade.

2009 is expected to be another down year with Zacks looking for $1.08 as recessionary trough earnings. Zacks sees a rebound to $1.15 in 2010 while Value Line is a bit more optimistic with a $1.20 estimate for next year.

Here are the per share numbers as reported by Value Line:

Yesterday’s closing price of $18.30 is lower than the lows in that whole seven year period reflected in the chart above. Almost exactly one year ago EXBD changed hands at over $46. In the final panic lows of March this year the shares briefly touched $12.40.

This is a healthy company. They have no debt and held over $70 million in cash as of March 31, 2009. They also held an additional $32.9 million in long term securities. Morningstar notes that Corporate Executive Board has a wide business moat and that they deal with 80% of the S&P 500 companies. Morningstar gives EXBD 4-stars (out of 5) and a ‘Fair Value’ estimate of $28/share.

Management did the prudent thing in lowering their dividend from $0.44 to $0.10 quarterly to bring it back to a sustainable payout ratio during these hard economic times. Even after the reduction, the current yield of 2.18% is better than most rates on bank CDs and treasury bills right now.

Once the economy shows signs of a rebound EXBD’s sales and earnings are likely to pick up significantly. While there is no near-term catalyst the absolute low price seems to take most of the risk out of these shares.

Here’s a 7.5 month play that looks great even if these shares go absolutely nowhere between now and January 16, 2010:

If EXBD shares remain above $17.50 through Jan. 16, 2010:

The $17.50 calls will be exercised.
You will sell your shares for $17,500.
The $17.50 puts will expire worthless.
You will have collected $300 in dividends.
You will have no further option obligations.

You will hold no shares and $17,800 cash for your original outlay of $12,900.

That’s a best-case scenario profit of $4,900 / $12,900 = 37.9% achieved in just 7.5 months on shares that did not need to move up at all.

What’s the risk?

If EXBD shares finish below $17.50 on Jan. 16, 2010:

The $17.50 calls will expire worthless.
The $17.50 puts will be exercised.
You will be forced to buy another 1000 shares and to lay out an additional $17,500 cash.
You will have collected $300 in dividends.
You will have no further option obligations.

You will end up owning 2000 shares of EXBD and $300 cash.

What’s the break-even point on the whole trade?

On the first 1000 shares it’s the $18.30 purchase price less the $3.00 /share call premium = $15.30 /share.

On the ‘put’ shares it’s the $17.50 strike price less the $2.40 put premium = $15.10 /share.

Your break-even is thus $15.20 /share (ignoring dividends).

Corporate Executive Board could fall by $3.10 /share or (-16.9%) without causing a loss on this trade.


This trade will return over 37% in less than eight months if:

  • EXBD shares go up.
  • EXBD shares stay unchanged.
  • EXBD shares decline to $17.50 (-4.37% from yesterday’s close).

You are protected against loss as long as EXBD does not decline
by more than 16.9%.

Disclosure: Author is long EXBD shares and short EXBD options.