PRDO - Perdoceo Education: Investing In Shareholder Value Consistent EPS Performance

2024-01-18 06:16:55 ET

Summary

• Perdoceo Education sees growth via Coding Dojo, corporate partnerships, and federal aid initiatives.
• Despite an expected Q4 2023 dip, Perdoceo projects positive FY 2023 with a low P/E ratio and dividends.
• Promising, but watch for regulatory risks, enrollment changes, legal issues, leadership shifts, and market swings.

In the rapidly evolving landscape of education, technology has proven to be a game-changer, enhancing the efficiency and effectiveness of educational offerings. The higher education market is on an upward trajectory, projected to reach $131.98 billion by 2029, growing at a CAGR of 9.3%. Perdoceo Education Corporation ( PRDO ), a small-cap player in this sector, has undertaken several initiatives that have increased its revenue and annual EPS. Notably, the acquisition of Coding Dojo at the end of 2022, the expansion of enrollments through corporate partnerships, and the leveraging of federal aid initiatives.

Despite the anticipated decline in EPS and revenue in Q4 2023 due to academic calendar changes and operational costs, the company’s strategic efforts are yielding positive results. This is evident in its attractive forward price-to-earnings ratio of 8.4. Moreover, Perdoceo Education offers a dividend program for investors, has increased its FY 2023 guidance and is exploring avenues to enhance shareholder value , including potential acquisitions and share repurchases. Therefore, investors may want to take a bullish stance on this stock.

Company overview

Perdoceo Education, established in 1994, offers postsecondary education through online, campus-based, and blended learning programs. It operates two segments: Colorado Technical University ( CTU ) and The American InterContinental University System (AIUS), offering programs in various disciplines. In December 2022, Perdoceo acquired Coding Dojo for $62.7 million, expanding its technical offerings. Perdoceo Education has been working towards increasing its enrollment and student retention rates through operational enhancements. A key part of this strategy involves investing in technology which is expected to be a major growth driver within the education market.

This includes the application of generative AI tools to streamline back-office operations, enhance student support processes, and foster a more engaging online classroom environment. Additionally, the company’s growing corporate partnership program, which provides education to employees, and its ability to leverage Federal student aid initiatives further contribute to potential growth.

Operational changes and updated academic calendars have impacted the enrollment for this year. The AIUS expects to deliver lower enrollment numbers for FY 2023, whilst CTU is likely to increase for FY 2023.

Despite an expected decline in Q4 revenue and EPS due to academic calendar changes, the company’s FY 2023 projections for operating income and adjusted earnings per diluted share are positive, ranging between $2.03 and $2.06, up from $1.63 in 2022. This makes Perdoceo a potentially interesting investment opportunity in the higher education market.

Financial overview

Perdoceo Education’s financial performance has been steadily improving over the past five years, with a modest 3-year CAGR of 3.05%. The company has consistently exceeded EPS expectations for five consecutive quarters, and the FY2023 EPS is projected to be $2.06, marking a growth of 26.38%. The company boasts a robust gross profit margin of 83.81%. The TTM net income stands at $146.4 million, a significant increase from FY2022.

Cash from operations remains positive at TTM $139.38 million, albeit a slight decrease from FY2022. Despite some cash burn when comparing FY2022 to TTM levered free cash flow, the company still maintains a positive levered free cash flow of TTM $103.61 million. This financial strength enables the company to reinvest in the business, service debts, and reward investors. The company paid a quarterly dividend of $0.11 per share in Q3 2023, approximately 20% of its TTM free cash flow.

A glance at the balance sheet reveals a healthy financial position, with total cash amounting to $595.26 million and a significantly lower total debt of $26.83 million. This solid financial footing is good to see, especially if we consider that the company is looking into acquisitions and rewarding its investors.

Valuation

Perdoceo Education’s FWD price-to-earnings ratio stands at an attractive 8.4, significantly below the consumer discretionary median of 15.42. This ratio is also lower than its five-year average of 9.4, suggesting that the stock could be undervalued. Over the past year, the stock has appreciated by 15.40%, and it has delivered returns of 41.89% over the past five years. While these returns are noteworthy, it’s important to consider them in the context of broader market performance. For instance, the S&P 500 has generated returns of 101.68% during the same five-year period. Over the last year, the company has increased its growth potential through acquisitions, increasing its partnerships with corporations, and operational changes to incorporate technology, and it is benefitting from the federal financial aid in place. These are reasons to believe the stock will continue to strengthen its performance in the near future.

Risk

While Perdoceo Education presents a promising investment, investors should also be aware of several risk factors. These include regulatory risks, as the education industry is heavily regulated and changes in policies could impact the company’s operations. Fluctuations in student enrollments could also impact revenue and profitability. Legal issues, such as past accusations of federa l Do-Not-Call List violations, could pose a risk to the company’s reputation and financial health. Recent leadership changes introduce an element of uncertainty, while market volatility could influence the stock price.

Final thoughts

Perdoceo Education is a small-cap player in the higher education market and shows promise with its strategic initiatives and financial performance. Despite anticipated declines in Q4 2023, the company’s forward price-to-earnings ratio of 8.4 and FY 2023 projections are positive. With its efforts to increase shareholder value, consistent EPS performance, and dividend program, Perdoceo Education could be an interesting investment opportunity in the evolving education sector. Therefore, investors may want to take a bullish stance on this stock.

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