PRDO - Perdoceo Education Corporation: Time To Buy

2023-11-07 07:30:42 ET

Summary

• Online education is experiencing significant growth perspectives with people switching to hybrid and off-campus studying.
• Perdoceo Education Corporation has provided good returns to shareholders, but it is still undervalued compared to peers and its average multiples.
• Beating the latest results together with announced dividends and alternative valuation proves that the company is not fairly priced now.

In response to COVID-19, the number of offerings for online education drastically increased, growing the competition in the industry. "NCES reports that 75% of all postsecondary students in the U.S" took online classes. The trend continues toward hybrid and online education and creates opportunities to participate in the changing environment. One of the players in this industry is Perdoceo Education Corporation (PRDO). The company provided good returns to its shareholders for the past year and recently published another beating quarter. With the market overview and peer analysis I will conclude that it is underpriced and I will back it up with an alternative valuation technique providing my price target.

Company overview

Perdoceo runs American Intercontinental University ((AIU)) and Colorado Technical University ((CTU)) and provides postsecondary education to students. They operate mainly online but also offer hybrid campus-based accredited academic studying. They have a wide range of programs from doctoral levels to carrier-specific education. Through the acquisitions , the company expanded its educational offerings with medical preparations and IT skills. It has a "Strong Buy" Quant rating along with a "Buy" rating from the SA and Wall Street analysts. Its shares had a strong performance with 47,25% 1-Year Total Return.

Market insight

Online education in the US is forecasted to reach $74.8 bln in 2023, with online university education prevailing and expected to grow 13.08% CAGR (2023-2027) according to Statista . The average ARPU is expected to be $1410 in 2023. The highest revenues per user are coming from Online University Education.

Another research suggests that online and hybrid models will continue to dominate until 2030 and while skills and credentials become at the center of the topic, universities are under pressure to respond to new industry workforce shortages. Looking at the diagram below it can be found that the fastest-growing occupations that require a bachelor`s degree or higher are Medical and Health Service Managers, explaining recent purchases by the company.

But there are also drawbacks to these rosy pictures as it is forecasted that non-degree credentials will be the most conferred award in US Higher Education over the next 10 years.

This raises the question of adaptation to the new reality, where the demand for a conventional education model will be replaced with more work-specific skills learning with a prevailing online form.

Peer Analysis

Source: Author, with data from Seeking Alpha

It can be seen that the year was profitable for shareholders in the industry, as an average Total Return was 14.7%. I have to mention that some of the competitors have only online education programs. As it can be seen PRDO is priced lower than the median in industry and average to its competitors. Moreover, the numbers are lower than its 5-year average, suggesting that it is underpriced and to move forward to its valuation.

Latest quarterly results

Revenue increased 8.3% to $562.1 million, driven by a 17.1% increase at CTU.

Operating income increased 25.7% to $134.5 million, while adjusted operating income increased 18.2% to $155.5 million.

The company provided further "beating" quarter improving in revenues and profit margin, but surprisingly missing the total student enrollments (decreased 34.2%).

Source: Author, with data from the company`s statements

Total operating expenses are lower due to decreased general and administrative costs and unusually significant other operating income (the information is not provided in the notes). But at the same time, the company had significant impairment charges, reducing the profit.

Using DuPont analysis, we can conclude that the main drivers of decreasing ROE and ROIC were decreasing profit margins and asset turnover ratio. The current profit margin exceeds 20%, which raises the belief in a higher return on investments this year.

Source: Author, with data from Morningstar

Another big plus for the shareholders was that the company declared a cash dividend in the third quarter. This with continuing share repurchases (at current prices) will positively affect the share price.

Risks

Starting with the dividends, there is no guarantee that the Board of Directors will approve the payment of cash dividends in the future, which may cause price fluctuations. Formal actions and claims that periodically arise may result in unfavorable outcomes.

A decline in enrollments may significantly affect the results. Increasing interest rates and "borrower defense to repayment" regulations may affect the profits.

Failing compliance with Title IV Programs and 90-10 regulations may have a significant negative effect on performance.

Valuation methodology

I used the same methodology as in my previous article, as the company generates a return on its net operating assets I forecasted sales (based on past performance and future trends) and simulated the statements for the coming years. The required return is WACC-calculated. Balance inputs depend on the sales figures of the company.

Valuation inputs and results

With the revenue continuing to rise this year as long as the profitability of the company, a long-term growth rate equals the average PRDO`s performance. The required return is WACC- calculated with beta 1.14.

In Thousands US Dollar, Except Per Share Amounts

Residual operating income is calculated as an excess return of the required rate and discounted. For continuing value, the growth rate is the average US GDP growth rate.

Valuation Risk

The growth rate is a 5-year average past performance, even a slight change will affect the price. If the growth rate continues to rise this year, it will result in a higher price target. Calculations don't include treasury shares which may result in dilution. Due to accounting principles, some of the figures I used in my reformulation might be slightly off, but I tried to minimize their influence. The latest quarter statements and annual statements lack some disclosure, for example, other income was not disclosed, making it difficult to forecast the performance -- although this had only a minor effect on my calculations. The latest results are non-GAAP and the amount of receivables is higher compared to the previous years, this may result in lower revenue figures later this year.

Conclusion

With the current price of $17, PRDO is a "Buy" now. It proved to have solid results, return on investments showed positive dynamics and acquisitions seemed to bring value. Continuing buybacks and announced dividends will increase the price short term. While the industry trends supply us with a long-term positive overview.

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