LOPE - Grand Canyon Education Looks Undervalued: Check The Revenue Per Student Growth

Summary

• Grand Canyon is an American company that offers school services for educational establishments such as colleges and universities.
• The upward trend in revenue per student may continue in the future.
• I believe that further increase in revenue and FCF margins driven by investments in technology will likely bring FCF growth.

Grand Canyon Education, Inc. ( LOPE ) recently reported an increase in revenue per student as a result of GCU traditional campus enrollments. In my view, if the integration of Orbis is properly done, and technology investment growth continues, I would expect free cash flow growth. Even taking into account risks from changes in the education regulation or risks from competitors, I believe that Grand Canyon is undervalued.

Grand Canyon: More Revenue Per Student

Grand Canyon is an American company that offers school services for educational establishments such as colleges and universities. The company currently reports 27 universities affiliated with its services, the most significant being Grand Canyon University, a non-profit corporation located in Arizona, which grants undergraduate and tertiary degrees online, and also has certificates at nine schools located between Phoenix and Arizona.

All the company's services are reported in a single segment, which covers learning management systems and infrastructures for clients, the administration of class calendars and educational programs for employees, and the area of ??communication and marketing, along with back-log services such as audit preparation or finance.

In my view, the most appealing thing about the company is the recent increase in revenue per student. The growth in the GCU traditional campus enrollments seems to explain the increase in revenue. The upward trend in revenue per student may continue in the future, so I believe that investors will do good by reading the following explanation from management.

The increase in revenue per student between years is primarily due to the service revenue impact of the growth in the GCU traditional campus enrollments between years which has a higher revenue per student due to room, board and other ancillary revenues and the higher revenue per student at off-campus classroom and laboratory sites. Source: Press Release

Service revenue per student for Accelerated Bachelor of Science in Nursing program students at off-campus classroom and laboratory sites generates a significantly higher revenue per student than we earn under our agreement with GCU, as these agreements generally provide us with a higher revenue share percentage, the partners have higher tuition rates than GCU and the majority of their students take more credits on average per semester. Source: Press Release

It is also worth noting that management expects to continue acquiring its own shares, which may, in my view, bring further demand for them. The guidance for the full year 2023 includes service revenue close to $939-$965 million and operating margin close to 24.2% and 25.9%.

Balance Sheet

As of December 31, 2022, the company reported cash of $120.409 million, investments of $61.295 million, and accounts receivable of $77.413 million. Income tax receivable stood at $2.788 million with other current assets worth $11.368 million, which implied total current assets of $273.273 million. The current assets/current liabilities ratio stands at more than 2x-3x, so I believe that liquidity does not seem like a problem for Grand Canyon.

Property and equipment stood at $147.504 million with right of use assets of $72.719 million. Amortizable intangible assets are equal to $176.800 million with goodwill worth $160.766 million. In sum, total assets are equal to $832.749 million.

If we take a look at the previous list of assets, we note that the total amount of cash decreased significantly. I found out that the company is using a large amount of cash to acquire its own shares. In less than two years, the share count decreased from more than 47 million to less than 32 million.

In January 2021, July 2021, January 2022 and October 2022 the Board of Directors increased the authorization under its existing stock repurchase program by $100,000, $970,000, $175,000 and $200,000, respectively, reflecting an aggregate authorization for share repurchases since the initiation of our program of $1,845,000. The expiration date on the repurchase authorization is December 31, 2023. Source: 10-k

I believe that the decrease in the share count contributed to the recent increase in the stock price, from around $74 per share to more than $111 per share. Stock repurchases are also expected for 2023, so I would expect more demand for the shares in 2023.

The company also reported accounts payable of $20.006 million, accrued compensation and benefits of $36.412 million, and accrued liabilities of $22.473 million. Income taxes payable were close to $12.167 million accompanied by a current portion of lease liability of $8.648 million. In sum, total current liabilities stood at $99.706 million, and total liabilities are equal to $195 million.

Assumptions In My Model

In the last 14 years, Grand Canyon has invested $291.8 million in technological developments to automate the key processes of its services with a view to scaling the business on a large scale. I believe that further investments in technology will most likely bring more revenue from students as the quality of the courses will likely increase. The recent increase in technology expenses is also quite impressive.

In 2019, through the acquisition of Orbis for $365 million, Grand Canyon Education was able to expand its offer in terms of programs and preparations for the health system, generating alliances with professionals in the field. The balance sheet of Orbis is shown in the image below. I believe that new acquisitions could occur. In my view, management knows how to acquire targets well.

My DCF Model Indicates A Fair Price Of Close To $144 Per Share

My forecast for 2032 includes 2032 net income of $379 million together with a share based compensation of $14 million, depreciation and amortization close to $30 million, and amortization of intangible assets of $15 million. Deferred income taxes would stand at $0.196 million with right of use assets of $9.615 million, while the other assets will be -$6,051 million. I also expect changes in accounts payable of -$21 million, changes in accrued liabilities of -$29 million, and adjustments for income taxes receivable of $32.867 million. Finally, I obtained 2032 net cash provided by operating activities of $409 million, which, with capex of -$53 million, implied a FCF of $356 million and net present value of $1,515,916 million. If we use a WACC of 9.5%, the NPV would stand at $1.5159 billion.

My CAPM model includes a beta of 0.8, the cost of equity of 10.3%, tax rate of 21%, and cost of debt of 5.9% with a WACC of 9.50%.

If we use an EV/FCF of 21x, the final value would be close to $7.47 billion, which would imply a NPV of $3 billion. The enterprise value would stand at $4.53 billion. Finally, with cash of $120 million, the equity would be $4.41 billion, and the fair price would stand at $144 per share.

Competitors And Risks

In the sector in which the company participates, the market leaders or relevant companies are Pearson ( PSO ) and Wiley Education Services ( WLY ). I believe that the EV/FCF ratio of 21x, which I assumed, appears conservative. PSO and WLY traded at close to 90x-15x in the past.

Competitors operate mainly through alliances with educational and non-profit institutions that historically have not developed infrastructures for learning content management or marketing and communication strategies to reach new students. It is worth noting that some of these competitors have more resources than Grand Canyon, so their marketing efforts and tech investments may be larger than that of Grand Canyon. As a result, the company could lose market share.

First of all, a lot of this company's profit comes from contracts with Grand Canyon University. Besides, the business of this company is conditioned by the rate of secondary students who want to get involved in tertiary education. In addition, the recruitment of students is highly determined by the ability of CGE to attract them through skillful marketing campaigns and education.

The ability to integrate recent and future acquisitions is also a significant risk. Key employees could leave the firm after the integration is expected. Besides, synergies realized could be lower than expected, which may damage the reputation of the company in the market. Lower FCF expectations could bring Grand Canyon stock price down.

On the other hand, there are legal conditions that could change the company’s education model. This refers to specificities of the legislation in the area of ??education, in which universities are empowered to provide certain types of courses categorized as fourth grade titles. A change in this sense would affect the business model of the company since most of its clients and affiliates are actually universities.

Takeaway

Grand Canyon recently reported an increase in the revenue per student thanks to the growth in the GCU traditional campus enrollments. I believe that further increase in revenue and FCF margins driven by investments in technology will likely bring FCF growth. If the company successfully further integrates Orbis, and perhaps acquires new targets, I would also expect further FCF growth. Even considering risks from changes in the regulation, changes in the industry, or failed M&A, I believe that Grand Canyon is undervalued.

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