Applied Portfolio Management Student Transportation Inc. Zulay Sosa Bazante Sashikanth Yenika April 14, 2016

Agenda Screening Process Business Overview Industry Analysis Financial Analysis Financial Projections Valuation Analysis Recommendation Takeaways Format: Good Content:

Screening Process Simple Business Model New Industry - GICS Map Market Cap < 1B Revenue < 1B Positive Net Income Margin 5YR Revenue CAGR > 10% P/E < Industry Average Debt < Equity Interest Expenses Tax Credit Returns

Business Overview Student Transportation Inc. Founded in 1997 and became a public company in 2004 Provides student transportation solutions in North America Operates nearly 13,000 vehicles Strategic alliance with Transportation Sector Consultants Renewal rate of ~95% Seasonal business 21 U.S. states and 2 Canadian provinces 2015 Annual Report

Business Overview SafeStop Millennial parents are very engaged on social media SafeStop™ App connects parents and school officials to school buses Combines routing systems with GPS tracking 60 schools and universities currently use the app The 2016 goal is to expand to over 450 schools 2015 Annual Report

Business Overview Revenue CAGR 24.4% Capital IQ

Business Overview SWOT Analysis SafeStop app Long term contracts 95% renewal rate Efficient fleet Optimization of school bus routes High leverage Capital intensive business Reliance on tax credits S W 10K school districts for potential contracts More customers looking for efficiencies Government policies Decrease in government funding Unsustainable dividends O T

Industry Analysis Overview High concentration STB market share: 5% Volatile revenues Industry revenue $9.5 billion IBISWorld

Industry Analysis Macroeconomic Drivers Number of K-12 students Government funding for primary and secondary education World price of crude oil $ per barrel IBISWorld

Industry Analysis Porter’s 5 Forces Barriers to Entry Threat of Substitutes Bargaining Power of Suppliers Bargaining Power of Buyers Competitive Rivalry Moderate Public school bus services Moderate Low High Moderate

Valuation Analysis Relative Valuation Not operating in same geography Doesn’t have same accounting standards Capital IQ, Annual reports

Valuation Analysis Relative Valuation Capital IQ, Annual reports

Financial Analysis Key Ratios DuPont Analysis 2015 and 2014 10-K

Financial Projections (In US$ m) Annual reports and group calculations

Financial Projections (In US$ m) Annual reports and group calculations

Valuation Analysis Discount Rate Cost of Equity Cost of Debt Discount Rate Annual reports, Capital IQ and group calculations

Valuation Analysis Discounted Cash Flow – Tax Benefits Annual reports and group calculations

Valuation Analysis Discounted Cash Flow – No Tax Benefits Annual reports and group calculations

Technical Analysis BEARISH SIGN BULLISH SIGN Yahoo! Finance

Recommendation External Drivers $4.63 $4.13 (NT) Implied Price WATCHLIST (CMP $4.87) DCF Valuation $2.95 $1.94 (NT) Triggers for review in future classes Improved margins Change in leverage Decreased dividends Comparable Valuation $6.32 External Drivers Stock Price Significant market potential New contracts Dividend yield 8.9% High leverage Liquidity risk Change in government policy Stock Price Annual reports, Capital IQ and group calculations

Takeaways Caution P/E ratio significantly higher than industry Dividends paid more than 10x earnings Very low returns Tax Credits Elaborates cost structure of companies in tax dependent business Simple business model but complex accounting Follow KISS not in just business model but overall company