LAUR - Laureate Education: An Emerging Market Bet

2023-04-27 15:11:03 ET

Summary

• The company has growth opportunities in Mexico and Peru.
• Emerging markets, in particular, pose greater risks than before, which could affect the company's stable operating metrics.
• The stock offers an opportunity for investors seeking exposure to emerging markets.

Upcoming Q1 Earnings Preview

Laureate Education, Inc. ( LAUR ) is expected to its Q1 2023 earnings on May 4, 2023. We would like to get investors an early preview. The Wall Street on average gave it a Buy rating according to Seeking Alpha ratings summary. It also was expected to report an EPS of -0.07 , an improvement from -0.25 EPS a year ago. Its revenue was expected to grow by 11.2% in this coming quarter. This article will review the company's fundamentals and have the investors well-prepared ahead of the earnings.

Investment Thesis

Cautious investors should beware of the potential risks associated with investing in Laureate Education. With the rise of global political instability and the potential impact of a Fed rate hike, emerging markets pose greater risks than ever before. While the company's operating metrics are stable, they could still be affected by these external factors.

Therefore, we caution investors to carefully consider their investment goals and risk tolerance before investing in this stock. However, This stock might offer a pleasantly unexpected possibility for return for investors looking for exposure to emerging markets as a means of balancing their portfolios.

Company Profile

The company operates a portfolio of degree-granting higher education institutions in Mexico and Peru where the demand for higher education is high due to the growing middle class, and limited public resources, resulting in opportunities for private education providers.

The company was founded in 1999 and expanded its coverage through a series of acquisitions thereafter. It had 423,000 students enrolled at five institutions with over 50 campuses as of Dec 2022.

The company emphasizes in fields of Medicine & Health Sciences, Engineering & Information Technology, and Business & Management.

Company Fundamentals

• Fields in licensing or certification requirements

Fields that require specific licenses and certificates to practice professionally can offer students a stable career path. A school's enrollment stability is often tied to the career prospects that it can offer its graduates. This ongoing education and training can help individuals maintain a competitive edge and advance their careers over time. The company's medical and dental schools in Mexico and Peru are accredited institutions that meet rigorous standards for licenses.

For example , medical school licenses are often the most difficult to obtain and are only granted to institutions that meet rigorous standards. Throughout Mexico and Peru, we operate 13 medical and seven dental schools.

The company maintained a student retention rate of 79% for the last five years. Prior to 2019, the average 5-year student retention rate was 80%. The stable retention rate ensures relatively stable enrollment and revenue streams.

Our historical annual student retention rate, which we define as the proportion of prior-year students returning in the current year (excluding graduating students), was 79% on average over the last five years.

Growth Drivers

• The company has growth opportunities in Mexico and Peru.

The percentage of student credit hours taken online in our campus-based institutions was approximately 27% for 2019. As we return to face-to-face operations at our campuses, we are targeting to have 40% to 60% percent of our student credit hours taken online going forward.

Industry

• Higher education is under-penetrated in Mexico and Peru

As below, the company focuses on niche markets for long-term growth opportunities. It targets emerging markets with stable government credit ratings. S&P rated Mexico and Peru governments with BBB and BBB+ credit ratings.

While global participation rates have increased for traditional higher education students (defined as 18 to 24-year-olds), the market for higher education in Mexico and Peru is still significantly under-penetrated, at approximately 34% and 52%, respectively, as compared to approximately 62% in the United States.

The fields of Medicine & Health Sciences, Engineering, and Information Technology are known for providing stable and reliable career paths, as well as the potential for higher-than-average salaries. These give students strong incentives to complete the courses.

According to data from the Organization for Economic Co-operation and Development ("OECD"), in countries that are members of the OECD, the earnings from employment for younger adults (25-34 years) and older adults (45-54 years) completing higher education were approximately 39% and 75% higher, respectively, than those of younger and older adults with only an upper secondary education.

The below stats provided by the company shows that, in Mexico and Peru, the private sector plays a meaningful role in higher education, bridging supply and demand imbalances created by a lack of capacity at public universities.

In Mexico , private education providers constitute 36% of the total higher-education market (42% in states where we operate). In Peru, private education providers constitute 73% of the total higher-education market.

Valuation

According to the information provided by the company below, we evaluated the relative performance of its peer group. Its peers listed by the company are based in the U.S.

The peer group included in the performance graph above consists of Strategic Education, Inc. (STRA), Adtalem Global Education Inc. (ATGE), Grand Canyon Education, Inc. (LOPE), Cogna Educação S.A. (COGN3), YDUQS Participacoes S.A. (YDUQ3), and Anima Holding S.A. (ANIM3).

From Seeking Alpha's numbers below, the company has a higher FWD revenue growth prospect, a lower FWD P/E ratio, and a competitive EBIT margin compared to its peers. It appears the stock is attractive at this price.

The company exited and sold its operations in Brazil, Australia, and New Zealand during 2020 and 2021. The decision to exit Brazil was influenced by the country's challenging economic and political environment. The decision to exit Australia and New Zealand was driven by the highly competitive nature of the education market in these countries.

Moreover, there are additional legal risk premiums to consider when investing in a US-listed and foreign operation stock as cross-border litigation is often time-consuming.

Catalysts

The company has no share repurchase and dividend program in place now. The stock return will be mainly from price appreciation.

• EPS growth

Mexico and Peru are important trade partners with developed countries such as US and Canada. Deglobalization can strengthen their position in the Western supply chain and further boost their economy. We think the company has a chance to grow its earnings in the mid-to long-term given the low penetration of higher education in its field.

• Valuation multiples expansion

Expanding the company's offerings of online courses presents a strategic opportunity to reach a wider customer base and increase enrollment.

By leveraging its existing digital infrastructure, the company can optimize the use of its resources and reduce operating costs, thereby expanding its profit margins. This can ultimately lead to a valuation multiples expansion.

Risks

Country risk

Mexico is highly dependent on trade with the United States. If the US economy entered into a prolonged recession, this can have a negative impact on Mexico's economy. While the technology sector depends on capital market investment, the healthcare sector depends on government funding. A poor economy may result in lower tax revenue for the government and a dormant capital market.

Peru has experienced political instability in recent years. On Dec 2022, S&P cut Peru's outlook to negative due to heightened political risk. Peru is facing high levels of political unrest and uncertainty in 2023, with ongoing protests and a deeply unpopular government.

Summary

We think the company had adopted a nimble approach to adjust its portfolio strategy. It positioned itself in niche fields with a relatively stable outlook. Its valuation metrics are reasonable and have the potential to improve. However, the country's risks are the focus. As global political instability is on the rise and the spillover effects from the Fed rate hike, emerging markets risks are higher than ever, in our opinion. We only recommend investors, who are looking for emerging market exposures for portfolio geographic balancing reasons, invest in this stock at the current price.

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