Soluskro

Investools: Too Many Accounting Red Flags

"In some respects, Investools is no more than a glorified Seminar company (save for its online brokerage business)!"

This is where a reader might insert his own mental "but" as in: "but what I am about to read may have been pertinent if the article was written circa 2005".

Briefly, the Education side has been heavily discounted by analysts.
Back in May07, this is what MCF had to say:

"In our new estimates, we made deep cuts in the contribution
from the indirect marketing channels to assume no recovery during the rest of FY07 nor in FY08."

This is when the sum of the parts analysis (focusing on the brokerage side-- so in MOST respects, SWIM is now a brokerage business) called for $16-20.

BMO in August07 had this to say:
Accounting for the company’s education segment revenues and expenses creates confusion about that segment’s results and generates GAAP losses on the consolidated company’s income
statements. That is bound to create some impact on valuation, simply because the accounting is not as clean as some brokerage competitors. However, we believe the cash flow generation and
adjusted earnings are more representative of Investools’ true underlying performance, consequently our analysis and recommendation take those metrics into account as well; both are
likely to accelerate meaningfully over the next couple years and are the key drivers of our
OUTPERFORM rating."

Misunderstood. Hmm. MCF has recently updated their targets to $19-23, not just because of the explosive TOS side growth but because the educational side, which was already heavily discounted by most, has seen renewed growth under the new pricing strategy. Seems that reports of the death of the edu side for all of 2007 and 2008 was premature.

On the broker side, you should take a moment to do some metrics comparisons with some of SWIM's competitors and you will clearly see the reason for the premium.

Overall, I do think you get some things right and you do provide a balanced view on things like the complaints and rebuttal. I just think the focus of the article is incorrect with respect to where or why someone might invest in this company. The edu side is not the story. It's the brokerage side which merits an article.

Regards,
Ed

Full disclosure: I am not affiliated in anyway with Investools. I do have a LONG position since 2005 and I have used the toolbox since 2005.