In one sentence: Using Grand Canyon Education's 2017 10-K, Phil shows how to hunt for capital expenditures, split maintenance from growth by reading the filing, guess when the filing won't say, and check the answer against the other pricing methods.
Key ideas
- Concentration. Rule #1 investors hold roughly ten companies, with 60–70% in the top five, so each one has to be understood and priced carefully. [00:00–02:00]
- Maintenance capex is not reported. Companies lump it with growth capex; you must separate them to see what the business yields if it never grew. [08:00–15:30]
- Where to look. Search the company's name plus "investor relations", open the SEC filings, and pull the 10-K as a PDF so you can search it. Companies often hide investor pages from their consumer site. [11:00–17:30]
- Verify third-party data. The screen's figure for LOPE's capex was wrong because the company reports two capex rows; the 10-K showed about $113M in capex plus about $10M for land and building work. Phil promises to improve the tool. [18:00–22:00]
- Rough owner-earnings arithmetic. Net income about $203M, plus depreciation about $54M, minus about $20M for receivables, plus $5M payables, plus about $80M of tax comes to roughly $315M before capex. Round and do it in your head. [22:00–24:30]
- Read the words. The filing says capex was "primarily related to" campus expansion. Danielle, a lawyer, reads "primarily" as the high end of "mostly", so most of it is growth. A search for enrolment shows students up about 10% a year, confirming growth. [25:00–33:00]
- Maintenance depends on growth. A school not growing its student body would call new buildings maintenance; one that is expanding does not. [28:00–32:00]
- Calling investor relations has limits. Companies are wary of giving non-public detail, and only the filed statements are legally binding, so use IR for pointers to public presentations and call transcripts. [34:00–41:00]
- Windage is fine. Phil simply assumes about $35M of maintenance, getting $200M of owner earnings, a 10 cap near $2B against a $5.3B market value. Tightening the number would not change the answer. [41:00–46:00]
- Triangulate. Margin of safety gives about $2.25B and the 10 cap about $2B, and the eight-year payback is higher because it includes growth. Two of three agree it is not on sale, so it goes on the watch list. [46:00–52:00]
- Use whole-company numbers. Danielle insists on total company figures, not per share, as an owner would. [49:00–50:00]
How it maps to RuleOne
- The screen's capex line is a convenience, not a ruling; check it against the 10-K on /stock/TICKER/ when a company splits its rows.
- The three methods on the stock page (10 cap, margin of safety, payback) are exactly the triangulation Phil runs here.
- The "on sale?" verdict maps to the watch list on /holdings/ and /.
Buffett, Munger and Graham links
- Maintenance versus growth capex is the core of Buffett's owner-earnings idea in the 1986 letter; see 183.
- Reading only the legally filed documents echoes Graham's insistence on audited facts, Security Analysis (ch. on the analyst's sources).
- Focused portfolios: Buffett's 1993 letter on concentration; see 164.
Words to know
- Capex: spending on assets that last longer than a year.
- Maintenance capex: spending needed to stay where you are.
- Windage: an educated guess that gets you in the ballpark.
- Investor relations: the company's contact for owners and analysts.
Try this
Choose a company with a clear growth story. Find "capital expenditures" in the 10-K and write the exact phrase the company uses to describe it. Decide whether it is mostly growth, guess a maintenance share, and check how much your 10-cap price changes if you are off by a third.
Check yourself
- Why can't you just read maintenance capex off the cash flow statement?
Answer
Companies report total capex, mixing maintenance and growth, so you must infer the split from the text and the business. - Why did Phil not sweat his $35M guess?
Answer
The company was priced at more than double the 10-cap value, so precision would not change the conclusion. - Why is a phone call to investor relations of limited use?
Answer
Companies avoid giving selective new information, and what they say verbally is not legally binding like a filing.
Short quotes
"You don't have to know precisely how good a deal it is. You just know it's a good deal." (Phil Town, ~45:30, auto-transcribed)