A Growth Stock in Purgatory

You can't create a value stock overnight. That's what the management team at Corporate Executive Board (EXBD - commentary - Cramer's Take) has learned this week.

On Tuesday, the executive-management firm announced a sizable share-repurchase program and dividend boost along with its fourth-quarter results. While these are usually the kind of strategies that investors urge a company to undertake, especially when activists become involved with value stocks, they weren't enough to cushion the blow of lower revenue guidance. At Thursday's closing price of $78.08, the stock has slid 17% since the announcement.

For 2007, Corporate Executive Board said it should generate sales of $553 million, compared with the previous consensus analyst estimate of $570 million. That's still up 20% from the previous year, though the company had grown its top line by at least 25% over each of the past five years.

Just before the outlook was released, the stock was trading at 40 times expected 2007 earnings of $2.40 a share. When shares are at such a lofty level, investors can be quick to flee at the first sign of smoke or, in this case, decelerating growth.

Corporate Executive Board does have a pristine balance sheet, with $487 million ($12.10 a share) of cash. This is more than sufficient to cover the company's new 40-cent quarterly dividend (2% yield) and $242 million buyback program (3.1 million shares).

That said, just look to Whole Foods (WFMI - commentary - Cramer's Take) for an example of a once-loved growth stock, where shareholder-friendly actions weren't enough to keep its investors happy in the face of declining growth. Back in November 2005, when the stock was trading at a split-adjusted $73.39, the grocery retailer announced a 20% dividend increase, a $2 special dividend and a $200 million share repurchase all on the same day.

Less than two months later, Whole Foods' stock went on to peak at an all-time high of $79.90. Since then, however, the company has struggled to meet internal growth expectations, and the shares now trade down at around $45. At current levels, the stock still trades at 30 times expected fiscal 2007 earnings of $1.49 a share, which is not a price where many value investors would buy it.

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David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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