2023-03-29 15:23:00 ET
Summary
- Perdoceo Education Corporation operates two for-profit educational institutions that mainly offer online degree programs.
- Perdoceo is recovering after a pandemic-related decline in enrollments, thanks in part to new marketing processes, and is likely to increase earnings and revenues this year.
- Perdoceo has a strong financial position and its shares are attractively valued.
Introduction
Investing can be a tricky game, especially in today's turbulent market environment. With so many uncertainties and risks, it's crucial to have a diversified portfolio that includes stable and profitable companies. One such company that's worth your attention is Perdoceo Education Corporation ( PRDO ).
Here's the gist of the investment thesis. (Keep in mind that Perdoceo is a stable investment, so don't expect explosive growth rates.) With two for-profit educational institutions that offer online degree programs, Perdoceo is turning around after a pandemic-related decline in enrollments, thanks in part to new marketing processes. Plus, it will likely increase earnings and revenues this year. With zero debt, ample cash reserves, and attractively valued shares, Perdoceo is well-positioned to weather market challenges. While regulatory risks exist, the fears of a complete industry downfall are overblown.
Recovery in Progress
Perdoceo Education Corporation owns and operates two for-profit educational institutions, Colorado Technical University ((CTU)) and American InterContinental University ((AIU)). These universities offer a range of postsecondary education programs, primarily online, with a focus on degree programs. AIU includes three universities - American InterContinental University, Trident University International, and California Southern University.
But let's get to the nitty-gritty: how is Perdoceo doing financially? Well, their 2022 earnings (adjusted EPS) dropped by 4%, and student enrollments fell by 3%, indicating a mediocre performance. However, the situation isn't alarming as the company is recovering after a rough start in 2022.
Perdoceo experienced a significant decline in enrollments due to the COVID-19 pandemic, which continued to impact the company in 2022. However, the company made changes to its marketing processes from the third quarter of 2021. While this had a short-term negative impact on enrollments, it was expected to eventually result in higher retention rates. And guess what? As the impact of the pandemic diminishes and Perdoceo's new marketing processes begin to show results, the company's performance is getting better. As mentioned earlier, the company saw a 3% decline in enrollments for the full year, which is actually a significant improvement from the 14.7% drop reported in Q1-2022.
With improvement in student engagement and retention rates, the company has entered 2023 in a better position. If this trend continues, then it will likely push its revenues and earnings higher. Besides, the company's recently closed $81.4 million acquisition of a software engineering bootcamp operator (Coding Dojo) should also help lift revenues and earnings.
Looking Ahead
Perdoceo aims to benefit from the demand for postsecondary education and growing acceptance of online universities. However, the current economic environment may pose a threat to Perdoceo's growth prospects. The Fed's interest rate hikes to control inflation have raised recession fears, which have been amplified by the banking sector's turmoil. The increase in interest rates impacts student loan rates and may make it more difficult for new students to finance their academic programs, leading to a decline in enrollment. This can negatively impact on Perdoceo's revenues and earnings.
But here's what I think: Perdoceo's primary focus on adult learners, including many professionals aged over 30, who tend to have more stable financial situations, coupled with the company's emphasis on career-relevant education, may give them an edge. By designing programs that prepare students for the job market, Perdoceo's colleges may continue to attract students even during an economic downturn.
Now, let's talk about the company's financial position. Perdoceo has zero debt and $518 million in cash reserves and short-term investments, which makes it well-positioned to withstand potential market challenges. It generates free cash flows, with $135.56 million of excess cash delivered in 2022. The free cash flows can further build its reserves, which could potentially be used for acquisitions to grow revenues and earnings. Perdoceo has a history of acquisitions to drive its growth and may pursue similar opportunities in 2023.
Too Cheap To Ignore
What's even more exciting is that Perdoceo is attractively valued, with shares trading at just 8.13x ttm earnings and 7.6x this year's earnings estimates, as per data from Seeking Alpha. That's well below the sector's median of 11.37x (ttm earnings) and 13.71x (fwd earnings). Its EV/EBITDA (ttm) multiple is a low 2.74x. Overall, the company holds a valuation grade of A+ on Seeking Alpha. In my opinion, Perdoceo is too cheap to ignore. With its solid financials, low valuations, and stable earnings, Perdoceo could be a valuable addition to any investment portfolio.
It's worth noting, however, that Perdoceo is not immune to regulatory risks . The for-profit postsecondary education industry has come under increased scrutiny in recent years, with government officials, accrediting agencies, state attorneys, and media all closely monitoring the sector. This has only intensified since the Biden administration took office, such as with calls to put curbs on the participation of for-profit institutions in tuition assistance programs. While these measures could significantly hinder Perdoceo's ability to generate healthy levels of revenues, profits, and cash flows, I think the excessive fears of a complete industry downfall are overblown.
Three years ago, there were concerns that a President from the Democratic Party could lead to the downfall of the for-profit postsecondary education industry. While the regulatory environment has become more challenging, the industry is still operating, and Perdoceo continues to function effectively. Investors should be aware of this regulatory risk when considering investing in Perdoceo Education Corporation, but I think the company's solid financials and attractively low valuations make it worth the risk.
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Investment 101: Enroll In Perdoceo Education Corporation