Last year, we evaluated Student Transportation Inc (STB) as an investment. We were intrigued by its high yield of 8% however we were displeased by the fact that the company was guzzling gas for acquisitions and increased capital expenditures. We were not foolhardy enough torecommend an outright short sale of the company because we felt that the 8% dividend yield was supporting the price of the shares and that dividend hungry investors didn’t know, didn’t show or didn’t care that the company’s biggest source of cash inflows was debt and equity issuance. We determined that it would be an underperformer relative to the major indexes such as the S&P 500 and the NASDAQ composite and we can see that our expectations back in September have come to pass as STB’s recent share price of $6.87 for its NASDAQ shares is slightly lower than the $7 it fetched when it went on the NASDAQ on September 6th, 2011.
September 25th was the big day for STB as it needed to prove to Saibus Research and Prescience Investment Group that it has changed its ways and was focused on shareholder friendly financial management. Based on its Q4 2012 results, we can see that the company is focused on chasing revenue at the expense of net income, EPS and ROICs and that is the subject of our report:
We didn’t mind the fact that the company had spent $6.4M on acquisitions during the quarter, especially since the company was able to realize an immediate bargain purchase gain for accounting purposes of $6.925M.However, we were shocked to see the company incur nearly $29.4M in net capital expenditures in the fourth quarter. We were hoping that the company would have realized that it got lucky in Q3 2012 when its secondary offering was oversubscribed and that it wouldn’t be prudent to count on dividend hungry retail investors to buy the shares from the company’s Canadian I-Bankers. We can see that STB’s management has already allocated more than half of the nearly $80M in cash from the Q3 2012 secondary offering for its typical ACD uses of cash which are as follows:
- Acquisitions: $6.4M
- Capital Expenditures: $29.4M
- Dividends $8M
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