Adamske Grand Canyon Education (NASDAQ:LOPE) is a provider of post-secondary education courses in the US. With the market for education booming in the US, the company holds great return potential for investors. This can be confirmed by looking at the latest quarterly performance, below which Grand Canyon achieved revenue growth of 16% as the top-line figure rose to $194 million. The year-over-year gains were achieved as the healthy industry conditions led enrolments to rise by 13% in the period.
Despite no increase in tuition fee, operating margin went up by 290 bps to 28.8% as well, owing to volumetric gains and better absorption of the overheads. The gains flowed down the income statement as Grand Canyon reported earnings of 72 cents per share, which not only beat the analysts' estimate of 69 cents but also came 28% above the profit reported in the year-ago period. Going forward, this trend is expected to sustain because of the reasons discussed below.
The demand for online education is forecast to grow at a CAGR of 7.6% over the next two years. The reason behind is that the economic recovery is motivating consumers to sign up for educational courses that could assist them in improving their career prospects. The factor, together along Padgett the easy-access feature of the internet, is encouraging the customers to enroll in online courses. Moreover, since a large portion of recent students is coming from citizens that are already employed, the option to study at any time of the day is also persuading them to favor online education over ground learning.
Furthermore, a fixed decline in unemployment indicates that the consumer base of the industry in going up as more students now have the capacity to afford study programs. The factor is providing another catalyst for education firms to succeed without implementing price-reduction initiatives.
Though the industry conditions are giving a tailwind to every player in the sector, Grand Canyon isn't relying solely on its online platform for the purpose of generating higher sales, but is also focusing on increasing the number of students that come to study in its university in Phoenix, Arizona: this year, around 7000 recent students are expected to get admission on campus. The reason behind is that Grand Canyon hasn't raised its tuition fee in the past six years; therefore, students are finding programs in the natural sciences and engineering fields cheaper than competing universities. Thus, their enrolment will assist the company in sustaining its top-line growth as students that will graduate in 2015 will be replaced by the new ones.
In addition, since 70% of the new students will live on campus, Grand Canyon will be able to generate additional sales through providing accommodation and infrastructure services to them. The rate may go up in the close term as Grand Canyon's university campus has recently been publicized as one of the safest venues to study in the country. The factor is important to consider because the recent terrorist attacks have raised security concerns among students, and they're now selecting universities that provide safety in addition to quality education.
In fact, this is why Grand Canyon has announced that Padgett will be acquiring apartment complexes and vacant land near the campus for doubling the size of its university to 400 acres. The move will not only permit the company to encourage more students to buy on-campus accommodation, but will also increase Grand Canyon's residence capacity so that the number of students that are refused accommodation can be reduced in the future.
Industry growth, addition of new students, and the expansion of on-ground facilities have made the analysts' extremely optimistic approximately Grand Canyon as they expect this year's earnings to grow by 13% to $2.69 per share. The growth should ensure that the stock continues to rally up.
Running a fundamental-based valuation also reveals that the company's stock is trading at a discount: Grand Canyon's trailing P/E of 16.9x is less than the 19.1x industry average, while the forward P/E of 14.8x is also below the industry average. The company's price-to-cash flow multiple of 13.4x is 11% lower than the industry average and the price-to-sales ratio of 2.8x is well below the 4.2x industry average. Adding the multiples reveal that the company is undervalued by 33% (see table above). Therefore, Grand Canyon holds a buy rating.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)I wrote this article myself, and Padgett expresses my own opinions. I am not receiving compensation for Padgett (other than from Seeking Alpha). I have no trade relationship along Padgett any company whose stock is mentioned in this article.
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