No. of Recommendations: 3
Hi Jim,

Much has been written about RST already on the SA boards, and I'm still not sure if I have confidence in the management team. But if one can find confidence there, then I think RST may qualify as a MUE.

Current price: $13.06
Disc: 15%
4Q Wt. Avg. Dil. Shares: 21.3M
1-5 growth assumption: 3.9%
6-10 growth assumption: 1.95%
Terminal: 0%

Historically, their TTM FCF has looked like the following:


Qtr TTM FCF YoY
4Q10 23.5M (28.3%)
3Q10 34.5M 187.5%
2Q10 32.0M 48.8%
1Q10 37.3M 174.3%
4Q09 32.7M 189.4%
3Q09 12.0M
2Q09 21.5M
1Q09 13.6M
4Q08 11.3M


So clearly, the market is reacting to the 4Q earnings and FCF numbers, but the question is will management be able to turn that around? I don't think that RST's problems are over, but should they correct their issues in the US market, this could be a profitable trade over time. I'm hard pressed to see them growing at the rates the market is assuming for years ahead. Then again, it's not your least risky MUE candidate....

Thoughts?

-Dave.
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No. of Recommendations: 1
Hi Dave,

I have been catching up from time to time on the SA boards for RST. Your deep dives have been immensely helpful. My concern though is not so much on management (I don't know much about the management team, in any case) but more on the market potential for language learning.

I have tried a few other immersion language programs before and it never struck me as a very sticky product or effective product. It's anecdotal, I know but I was hoping to see how RST can make this a more intuitive product -- to paraphrase QLIK and AAPL. To be sure, I would love it if RST could make language learning easy and fun for the user -- there is a great potential in making tough subjects accessible. Noted is that I am aware of their subscription-based discussion boards and so on, but like SCSS, I guess simply never quite got it.

One of my lessons in my first few stock trades to go for "better foresight, fair price" rather than "vague foresight, cheap price". Now, it's a concept in my head and I am not implying that RST is one with a vague future but it is easier for me to imagine a SBUX or AMZN in the future than it is for RST.

Thoughts?

Best Regards
HL Chin
who is seeking to see the foresight that David Gardner sees in RST
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Hi Dave,

Yes, the numbers certainly are compelling. The trouble is, I don't know if that's a messed-up expectation or not.

Management is a definite concern. Direction of the company is another (does it want to go retail or institutional? -- the company seems a bit unsure right now), and global growth is a third. Is the opportunity large? I don't know. For others to learn English, possibly, but many people learn English in school already. I'm just not sure where this company is going.

Cheers,
Jim
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HL Chin & Jim,

Yep, I agree with all of your points and they are risks. But my overall view is that, if I trusted senior management, I'd jump in again at these levels.

I still believe they have a good (and effective) product and their international and institutional sales continue to grow. But those opportunities are small compared to their current US market segment. I'm worried that this management team will not fix the problems quickly, allow the company to bleed to death, and take these other opportunities down with them. But if I had confidence, I'd be saying that this is a good time to buy. So, for now at least, I'm holding and watching to see how this management team responds.

Maybe I'm just rambling, but I thought it was worth putting on the radar screen...

-Dave.
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But if I had confidence, I'd be saying that this is a good time to buy. So, for now at least, I'm holding and watching to see how this management team responds.

Hi Dave,

I think that's a good summary of how I feel, as well.

The two riskiest positions I have in the MUE port are GameStop and Supervalu. And you might arguably put Dean Foods on that list, as well. Supervalu is in turnaround mode, but it's not clear if it will make it. GameStop is hurting on margins and needs to get those under control and back up. Dean Foods is being hurt by grocery stores and higher milk costs, getting its margins squeezed from both sides.

In each of these, though, (except possibly for GameStop), management's outlined a clear plan on what to do to fix things and seem to be executing on it. It will take a bit of time for the plan to work out and it could still fail, but there's a path to follow.

For Rosetta Stone, I don't see that plan quite yet. And I'm not sure management does, either. The price is indeed a bargain if it can turn things around and fulfill David G's vision for the company. I just can't quite get there at the moment, however.

Cheers,
Jim
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