LAUR - Laureate Education Should Rebound But Not Soon

Summary

• In the education stock industry, Laureate Education, Inc. appears to have some interesting catalysts for higher stock prices.
• Laureate Education's operating profitability is improving, but its financial position is still not 100% sound.
• The company is poised to benefit from positive trends in the higher education market system in Peru and Mexico.
• Laureate Education stock isn't expensive, but high inflation, the Fed's hawkish stance, and the expected recession in 2023 will put additional pressure on the shares.
• Investors should wait for headwinds to create cheaper entry points into Laureate Education, Inc. stock.

Looking For Opportunities Among Educational Stocks

The recent 2020 pandemic crisis has made the following relationship even clearer: not only are the best-educated workers more likely to get a well-paid job than the lower-skilled ones, but they are also more likely to keep the job during an economic crisis.

As the economy pulled back in 2020 due to restrictions and lockdowns to prevent the spread of the COVID-19 virus, job losses recorded the highest rate among workers whose educational attainment did not exceed a high school diploma, according to the U.S. Bureau of Labor Statistics.

The organization's economists added that the future trend will mean that no more than 30% of the 171 million jobs expected in 2031 will still be accessible to employees without a college degree.

Among the companies listed on U.S. stock exchanges, there is no shortage of education and training services stocks looking to take advantage of the above trend to expand their business and capture the interest of U.S. equity investors.

One stock for U.S. investors to keep an eye on is Laureate Education, Inc. ( LAUR ). The company appears positioned to capitalize on very interesting trends in the education sector in Peru and Mexico.

The company's shares are down 18.11% so far this year amid the same headwinds that pushed the SPDR S&P 500 Trust ETF ( SPY ), the benchmark index for the U.S. market, down 20.56%.

Once these headwinds are overcome, the stock should rebound nicely, aided by certain catalysts from bright prospects for the education and training industry in Central and South America, which is where the demand for the company's education services comes from.

About Laureate Education, Inc.

Headquartered in Miami, Florida, Laureate Education is a provider of higher education programs and services available to students through a network of universities and higher education institutions.

Laureate Education's portfolio consists of bachelor's and master's degrees for students wishing to acquire skills in business and management, medicine and health sciences, and engineering and information technology.

These educational programs are currently offered to students through an organized campus at five universities in Mexico and Peru.

The Financial Results For The Third Quarter Of 2022: Encouraging Trends In 12-Month Revenues, Profits And Margins

Laureate Education activity continued to experience growth momentum in Q3 2022 , driven by strong trends in new enrollments during admission cycles in both Mexico and Peru.

The company reported a 12% year-over-year increase in revenue to $301 million in the third quarter of 2022, while organic revenue growth at constant exchange rates was 11%.

For the third quarter of 2022, the company's net income of $31 million was much lower than the net income of $360.1 million for the same quarter last year, but the latter included the gain on the sale of Walden University.

On a 12-month basis, both revenue and net income excluding one-time items have improved over the past year, as shown in the chart below.

The TTM profit margin rate is also improving significantly, turning around from -1.73% as of June 30, 2022, to 1.84% as of September 30, 2022.

While adjusted EBITDA of $72.8 million for the third quarter of 2022 was down 4% year-over-year due to costs associated with on-campus operations combined with certain timing factors.

Instead, the following chart shows the positive development of the 12-month EBITDA over the past year.

The Higher Education Systems In Peru And Mexico Offer Many Growth Opportunities For Laureate Education

As Laureate Education offers its education and training products and services to Peruvian and Mexican students, its business should benefit from the following trends seen in the education systems of the two American countries, as detailed in two U.S. International Trade Administration reports.

Although the impact of the COVID-19 pandemic on a heavily indebted Peruvian government has curtailed public spending on education, enrollment has increased significantly over the years, giving 70% of the total K-12 age population access to initial education.

Despite all the setbacks of a socio-economic nature and high drop-out rates in rural areas, the present lays a solid foundation for an impressive increase in the number of university students in the coming years.

Private companies are investing in universities in Peru with the aim of improving the quality of the services they offer students while expanding their geographic reach within the South American country. The UK and US have been tasked by the Peruvian government to increase the number of educational institutions in the country.

Laureate Education's engineering and information technology offerings should benefit from the Mexican's strategy of fostering collaborative relationships between US community colleges and technical universities across Mexico.

U.S. education providers such as Laureate Education are expected to capitalize on Mexico's need to supply the domestic market with candidates with good IT skills.

In addition, programs such as Quality Control, Management, and also English Language currently appear to be in high demand in Mexico, which is good news for Laureate Education's portfolio of business and management courses.

The Financial Condition Must Be Improved

Laureate Education will seek to further penetrate the Peruvian and Mexican markets, backed by what the company believes to be a solid financial profile.

As of September 30, 2022, Laureate had a net debt position of about $192 million with an interest coverage ratio of 13.19, indicating that there is no difficulty in paying the interest expense due on the total outstanding debt. The interest coverage ratio is calculated as a 12-month operating income of $225.7 million divided by a 12-month interest expense of $17.1 million.

However, this balance sheet has an Altman Z-Score of 1.83, indicating areas of financial distress that imply a risk of bankruptcy that could materialize within a few years.

The Stock Valuation

Shares of Laureate Education were exchanging hands at $9.67 apiece for a market cap of $1.53 billion and a forward price-earnings ratio of 21.73x.

The stock also has a 52-week range of $9.22 to $12.72 and its share price is trading significantly below the long-term trend of the 200-day simple moving average line of $11.43.

After last year's downturn, shares don't look expensive, which, combined with interesting catalysts for higher sales and earnings, could lead to a buying trend going forward. However, the strong headwinds from inflation and rate hikes, which have dragged shares down more than 18% so far this year, look set to continue for some months in 2023, on top of the expected mid-year recession which will also exert its downward pressures on the stock price.

This means that Laureate Education's share price is likely to fall further and a 14-day relative strength indicator of 41.81 suggests that lower levels are possible as the indicator means oversold levels are still a long way off.

Investors can therefore hold Laureate Education until headwinds ease and confidence in investing in U.S.-listed equities returns. After the bearish sentiment, it will be possible to increase the position with the potential to take advantage of cheaper entry points.

It is also possible that Laureate Education will recover from current levels, but the probability of this event occurring is slim. A beta of 0.49 over 24 months implies that Laureate Education will track the expected decline of the US stock market index [US500] from $3,781.07 as of Dec. 28 to a one-year price target of $3,365.42 .

Laureate Education does not currently pay regular dividends but issued two special cash distributions on October 12 of $0.83 per share and November 17 of $0.68 per share.

Conclusion

Investors seeking opportunities in the education stock industry should check out Laureate Education, Inc., as this stock seems to have some interesting catalysts for higher share prices.

Laureate Education, Inc. should benefit from positive trends in the higher education market system in Peru and Mexico.

Laureate Education, Inc. stock is not expensive, but shares are likely to continue trading lower amid pressure from high inflation, the Fed's hawkish stance, and the expected recession in 2023.

Investors should therefore wait for the headwinds to dampen the share price for more favorable entry points to Laureate Education, Inc.

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