CAST Conversation

I spoke with management at CAST today. I was impressed that they called me given the 11 hour time differential, it was 10 or 11pm for them. The first question I had was the rationale behind the additional shares given they had $56m in cash. They were quite upfront. They said they are planning an acquisition that will cost around $70m. They admitted that this is a very difficult time to raise capital, but thought it was a good opportunity. A secondary reason for the offering was to increase the float of the company's shares.

They said they are buying a bricks & mortar educational facility. While I can not judge whether this is smart, it will likely hurt them as far as MFI goes. This is because their property/plant on their balance sheet is increasing, which will give them a lower ROIC. Obviously bricks and mortar education is not as scalable as on-line education.

I asked about their auditor. They were actually started by Hughes (Direct TV) and use the same auditor (Deloitte & Touche) so I think people should have a little more comfort that they don't have three sets of books (one for govt, one for stockholders and one for wife).

They are sending me some slides from a recent investor conference where they are compared against their peers by various valuation metrics. They told me (as we know) that all the metrics show them as incredibly cheap. They were quite bullish about 2009, certainly higher than consensus on Yahoo.

They did explain their online approach, rather than actually offering the coursework, they are the middle man between the university and the online student. Obviously that is a high ROC approach.

They did say there is a lot of competition in China, and that is one reason they are trying to grow via acquisition. They think they need a certain economy of scale. They do have strong cash flow, student pay cash for entire year in September (so you'll probably see seasonality in cash).

All-in-all, I hung-up satisfied with my investment. I don't think I'll add more right now, but if they drop post acquisition, I might add some shares.