Hopkins has a valid complaint about gem paying more dividend than it should. He might also have a valid concern about debt (but mishandled the details). But these messages are sadly undermined by several factual and logical errors.
1. GEMs pe is not 20. Never use trailing pe to evaluate a firm that has since grown significantly. FY15 pe is estimated at 12 and FY16 at 10 (but Fy16 estimate is as bad as relying on FY14 numbers)
2. ROE is around 17, not 4.5. Again, Hopkins has relied on misplaced statistics to prove his thesis. Notice, too, that he says gems ROE is "consistently" low, then refers to the much higher recent numbers.
3. No competitive advantage? This would be true if childcare is a commodity such that parents don't care where they send their kids. Not saying that GEMs brands have differentiating value (but see posts a few months ago on parents positive commentary on childcare forums). However, hopkins is lacks basic marketing knowledge. Also notice the logical nonsequitors in that para.
4. A bit late to criticize GEMs cash flow vs dividend. Hopkins own chart (since removed?) shows that cash flow is positive now, slightly negative in past years (before underwriting adjustment). Still, I believe the div should be 80% or less of eps when funds can acquire businesses at 4 times ebitda.
5. Hopkins criticized gem underwriting drps (since removed from article?), yet the effect of paying out from cash flow or dilution is the same (if my financial theory is correct). Although debatable, underwritten drps are standard practice in some industries (banks, I recall).
GEM Price at posting:
$3.30 Sentiment: None Disclosure: Held
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