LINC - Lincoln Educational: Bridging The Career Gap With Hands-On Skills

2024-01-11 00:06:36 ET

Summary

• Lincoln Education Services has provided investors with a 220.82% return in the last five years.
• The company has an upward trending TTM top and bottom lines and aims to double its EBITDA by FY2025.
• LINC is implementing a new hybrid instructional platform and expanding its campuses, showing commitment to innovation and growth.

Lincoln Educational Services Corporation ( LINC ) has been a rewarding stock to hold over the last five years, increasing in value by 220.82%. The company is often seen as a go-to stock in economic downturns, as an increase in unemployment benefits the company's number of student enrollments. This year, the company has been increasing enrollments irrespective of a relatively unchanged and low unemployment rate in the US, benefiting from a growing skills gap as employers are unable to fill their technical positions.

Lincoln Educational Services has experienced significant growth in student enrollment in the last two quarters, which has had a positive impact on the company's top and bottom lines. Additionally, it is rolling out a hybrid platform that aims to improve graduation rates and profitability. While it is important to be cautious about the company's cash burn, it has a healthy balance sheet and potential for further growth as learners seek to upskill in an ever-changing and demanding work environment. As a result, investors may want to consider taking a bullish stance on this stock with a low FWD price-to-earnings ratio of 10.44.12.

Company overview

Lincoln Educational Services, founded in 1946, offers various post-secondary courses across 22 campuses in 14 states , catering to high school graduates and working adults. The company currently serves over 12,000 students, with an average enrollment of 12,942 in Q3 2023, with specialised programs in a variety of trades, automotive technology, health sciences, hospitality services, and a small focus on IT. Lincoln Educational Services has a goal to increase EBITDA to $56 million in FY2025. The company has a number of strategies to achieve this. One major effort is transitioning to a new hybrid learning platform, Lincoln 10.0, expected to be fully operational by 2025.

This platform combines on-campus and online instruction, allowing students to balance their studies with other commitments. It's designed to increase graduation rates and is expected to provide future savings. Furthermore, it is looking towards organic growth through new programs and new school constructions. The company also looks at inorganic growth through strategic acquisitions to expand market share, diversify offerings, and increase economies of scale cost savings. The company has been able to capitalise on the widening workforce skill gap , particularly in technical positions, which presents an ongoing opportunity.

Financial overview

Lincoln Educational Services has increased its top line over the last five years, and TTM is higher than FY 2022 at $367.3 million, although the gross profit margin is slightly lower at 57.05%. In its most recent quarter, Q3 2023, the company reported a 10.5% revenue growth to $99.5 million and a 7.1% increase in student starts.

We can observe an upward trend in the company's net income, with the TTM results of $27.8 million compared to $12.6 million in FY2022, which has more than doubled.

The company has been making significant changes and investing in growth by introducing new courses, platforms, and locations. However, it seems that this growth strategy is affecting the company's levered free cash flow, which is currently negative $30.8 million TTM. This indicates a negative cash flow trend for almost three years now, which is a cause for concern.

If we look at the company's balance sheet, we can observe that the total cash available with the company is $66.06 million. However, the company's total debt amounts to $102.81 million. The decrease in cash is a result of the purchase of the Pennsylvania property and building fees. However, if we analyze the current ratio of 1.98 and a quick ratio of 1.61, we can conclude that the company has enough liquidity to cover its short-term liabilities.

Valuation

The stock's performance over the past year has been impressive, outpacing the S&P index in all but the most recent quarter. This momentum is reflected in Seeking Alpha's Quant rating, which assigns the stock a solid A- valuation. What's behind this strong market performance? The company has launched several growth initiatives that are already bearing fruit. These include the introduction of a hybrid platform and a strategic expansion of its physical presence. When we look at the stock's price-to-earnings ratio, it stands at an appealing 10.27. This is significantly lower than the median of 16.01 for the consumer discretionary segment. Moreover, it's well below its five-year average of 17.45, suggesting that the stock may be undervalued at present. The company has set ambitious goals for itself, aiming to double its EBITDA by FY2025 to reach $56 million. Given its recent performance and growth initiatives, this target seems well within reach.

Risks

Investors considering Lincoln Educational Services Corporation should be aware of several potential risks. The company is rolling out a new hybrid instructional platform, Lincoln 10.0, which combines hands-on learning at campus facilities with online instruction. The success of this platform and its impact on revenue per student growth is not guaranteed and could pose a risk. The company reported a 10.5% revenue increase and a 7% student start growth in the third quarter. While these figures are positive, they may not be sustainable in the long term. The company is increasing its guidance for the full year based on its top-line results. However, this is based on current performance and may not accurately predict future performance.

Final thoughts

Lincoln Educational Services has proven to be a rewarding investment, appreciating by 220.82% over the past five years. The company's growth initiatives, such as the hybrid platform and physical expansion, have led to significant enrollment growth. Despite a negative trend in levered free cash flow, the company's healthy balance sheet and clear growth strategies provide a positive outlook. With a low forward price-to-earnings ratio of 10.44, investors may want to take a bullish stance on this stock.

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