LOPE - Grand Canyon Education: Positive Traction Warrants A Buy

2023-08-29 12:01:20 ET

Summary

• Grand Canyon Education has had some volatile years since the pandemic with a spike in enrollments during COVID followed by a reset.
• It has demonstrated strong earnings momentum as a result of its focus on job ready programs, affordability with no tuition increases and hybrid approach enabling students to work part time.
• We believe LOPE is poised to capitalize on its position amidst the current environment and assign a Buy rating.

Investment Thesis

Grand Canyon Education ( LOPE ) had a mixed earnings since the pandemic as the surge in COVID-19 compelled students to pursue courses online which led to an increase in enrollments pushing the stock price above $110 levels in the months entering 2021, however, as situations normalized, it led to a decline in enrollments which pushed the stock back to sub-$80 levels. However, the company has demonstrated strong momentum post the pandemic reset with its push on hybrid/ online model, improvement in utilization for Grand Canyon University (GCU) to drive revenue growth vs. jacking up tuition prices like other competitors, and focused on skill relevant courses. It has consistently shown strong earnings growth, beat estimates and upgraded guidance. We initiate at Buy with a target price of $132 (at 20x 2023 P/E)

Company Overview

LOPE is a shared service partner offering wide range of services to colleges and universities. It provides technology and academic services including LMS and online course delivery and management, student records as well as assistance in content development and faculty related training. It also provides counselling services and support to prospective and current students of its university partners including admissions, financial aid and other counselling. It has about 27 university partners with GCU being the significant university partner through its Master Services Agreement which offers 60% of its net tuition and fee revenues to GCE.

Earnings Growth

LOPE reported a strong Q2 earnings topping consensus with revenue growth of 5.4% YoY to $211 mn (vs consensus $208 mn) primarily driven by a 4% increase in total student enrollment at GCU along with an uptick in revenue per student as a result of better utilization and ancillary revenues. The growth in new student starts was driven by the continued expansion of its programs with increasing relevancy of job ready skills, a hybrid environment allowing students to work part time and affordability. Net tuition increases for GCU has been just 1% compared to 2018 while US CPI for college tuition and fees has jumped over 10% during the same period.

Adjusted EBITDA margins were flattish at 22.6% vs 22.8% last year as higher revenue growth were largely offset by an increase in compensation and employee benefits costs due to a jump in headcount as well as salary hikes. Non-GAAP diluted EPS came in at $1.01 beating analyst consensus pegged at $0.85, primarily driven by a $0.09 contribution from the investment income and 5% reduction in share count (30.3 mn currently vs 31.9 mn).

Balance sheet position improved with cash and cash equivalent of $233 mn (vs $195 mn in previous quarter and $200 mn last year) driven by strong cash generation while the company continues to remain debt-free. It continue to focus on share repurchases having repurchased $45 mn in the current quarter with further $102 mn share purchase under authorization.

It raised and further tightened its guidance for Q3 and Q4 on the back of improving momentum and beat in Q2. It reiterated its guidance for Q3 revenues tightening to $218.5-$220.5 mn (from $215.5-$223 mn previously) while it expects Q4 revenues to be $269.5-$274 mn (from $268.5-$283 mn previously). It raised its EPS guidance for Q3 at $1.04 vs $0.96 previously and Q4 EPS of $2.55 vs $2.50 previously.

Valuation

LOPE trades at 17.1x Forward PE compared to 16.5x relative to its peers.

We believe a premium is warranted as a result of its strong profitability metrics, financial flexibility with zero debt and growth opportunities.

We assign a 20% premium to its peers at 20x Forward PE implying a target price of $132. Initiate with a Buy.

Risks to Rating

Risks to rating include:

1) LOPE operates in a highly regulated education sector and is dependent on federal funding and any violation or any change in regulation resulting in funding declines or increase in costs or any fines and/or sanctions would be detrimental to its operations.

2) LOPE is dependent significantly on Grand Canyon University and any impact on the enrollment figures or an underwhelming response to its planned programs can have a negative impact on its overall operations.

3) Competition from other traditional universities, online educational technology companies and other peers is intensive and any shift in enrollments towards online ed-tech or traditional companies can impact business.

Final Takeaways

LOPE had a volatile earnings in the past with margin growth not being able to follow through from the revenue growth. However, the company delivered a strong earnings momentum and made significant progress over the past 2 quarters.

We believe LOPE will continue to drive enrollments driven by its focus on skills ready programs along with its online model enabling students to work part time, along with affordability amidst burgeoning tuition costs. Initiate at Buy with a target price of $132 (at 20x 2023 P/E).

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