LOPE - Grand Canyon Education: Enrollment Spike To Lead To Additional Share Price Gains

2023-12-29 10:35:30 ET

Summary

• Shares of Grand Canyon Education have ended a long multi-year period of sideways consolidation and have seen a significant change in trend, with a 36% increase since June.
• LOPE's recent Q3 earnings beat, driven by strong enrollment and retention numbers, demonstrates the company's resilience and ability to take advantage of the labor shortage in the US.
• The company's strategic investments in online courses tailored to market demand and a focus on student outcomes have resulted in increased enrollment and retention rates, indicating sustained growth potential.

Intro

We wrote about Grand Canyon Education, Inc. ( LOPE ) in June of this year when we maintained our 'Hold' rating on the US educational company. As we see below from the long-term technical chart, shares mostly were caught in a sideways consolidation pattern since 2018 but this 'consolidation' may finally have ended as we learn below. You see, the technicals are often merely the result of the company's fundamentals at the time.

Therefore, the lack of direction, shares of LOPE underwent over the past 5 years came down to a lack of sustained growth. Remember, the market (being a predictive mechanism) is constantly attempting to ascertain how profitable the stock in question will be over the next 12 to 18 months. Therefore the significant change in trend (where shares have returned over 36% since our most recent commentary in June) should not be taken lightly. We believe that the marginal breakout above long-term resistance (as shown below) offers a very low-risk entry here on the long side in that the $125 to $130 level should now act as strong underside support. Suffice it to say, given what we have seen from LOPE in recent quarters (and particularly its recent third-quarter report), we are upgrading our rating in LOPE from a 'Hold' to now a 'Buy'.

Multiple Trends Point To Sustained Growth

LOPE's recent Q3 earnings beat marked the seventh consecutive earnings beat for the company. However, it was the magnitude of the earnings beat ($0.18 per share over consensus) that was the most revealing. The above-average bottom-line print came about as a result of both strong enrollment numbers as well as above-average retention numbers. These trends demonstrate the resiliency of Grand Canyon Education & Grand Canyon University in that the company has set itself up to take advantage of the stark labor shortage which has now become prevalent in the US in recent times.

Suffice it to say, it has now become clear that the consolidation LOPE underwent over the past 5 years was indeed a bottoming pattern through the COVID-19 pandemic. Whereas traditional universities decided to wind down their course selection through the pandemic (due to the lack of demand), LOPE decided to keep investing through the cycle and now it looks like the company is about to reap the fruit of those efforts. One such investment on the online side was to tailor courses to what the market was indeed asking for. The rolling out of a sizable number of new courses was smart as LOPE created those courses with both the student & employer (who lacked manpower) in mind (Heightened demand). Furthermore, all the time, management kept a lid on increasing prices on the front end as it knew profits would be made down the line on the back end due to better student engagement levels.

This strategy enabled students to see a clear line of sight to the position (and salary) students would attain after completing their studies. 'Starting with the end in mind' where LODE subconsciously 'sold' the 'result' of finishing one's studies and attaining the desired position had a positive effect on retention rates also.

Furthermore, with enrollments in the hybrid campus on the increase & GCU's Center For Workforce Development continuing to go from strength to strength, growth looks like it will continue into 2024 & beyond. If we zone into the behavior of traditional students, management pointed out rising trends both in the subset who continue to have presential classes on campus as well as the subset who prefer to do their studies from home. Growing GCU visits definitely 'locks' customers more into LOPE's business which is an encouraging trend from an investor's standpoint.

Forward-Looking Earnings Revisions

Suffice it to say, that the bullish trends above appear that they will last for some time due to present market conditions. If we look at how consensus has revised up LOPE's earnings for fiscal 2023 over the past 3 & 6 months respectively, we see very similar markups for these periods also in fiscal 2024. This demonstrates that a sustained trend-change has taken place which is evident from LOPE's near-term growth numbers. What we mean by this is that leading indicators such as higher service revenue & revenue per student (which positively affected operating margin in Q3) all point to growth being sustained going forward.

Conclusion

To sum up, based on recent trends, we are upgrading our rating in LOPE from a 'Hold' to a 'Buy. We do expect some near-term volatility as a result of the FTC filing suit against the company but as long as shares remain above their 2018 highs, we see further gains in Grand Canyon Education. We look forward to continued coverage.

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