Perdoceo Education Corporation (PRDO) reported Q2 earnings this week, and they were outstanding. Some highlights:
- Revenue increased 13 percent to $176 million
- New enrollments increased 45% Y/Y
- Total enrollments increased 20% Y/Y
These are accelerations sequentially, and notably, higher accelerations Y/Y that lead the industry by a wide margin.
Whereas other traded education companies are reporting largely flat or negative growth and forecasts for the remainder of 2020, Perdoceo is growing its income, balance sheet, and cash flows at all levels. And it doesn’t take a very long observation to see how much traditional public and private U.S. schools are and will continue to struggle under COVID-19 – and they aren’t even open yet.
Despite Perdoceo’s stated positives and significant headwinds faced by others, the company basically is in the last place as far as valuation among peer companies, creating a compelling opportunity for investors. For example:
|Company||Enterprise Value||TTM FCF or Projected FCF for 2020|
|PRDO||677 million||122 million (but adjusted is 160 million)|
|STRA||2128 million||165 million|
|LAUR||3639 million||150 – 180 million in 2020|
Notably, STRA was trading at a 3 billion EV just 2 weeks ago, before announcing flat future guidance and an acquisition for $650 million, requiring all of their cash and more; an M&A price many in the market view as too rich. This week, they announced a dilutive follow-on offering to help raise cash for this acquisition.
Also, notable, PRDO has GAAP TTM FCF of $122 million, but if adjusted for two legal items that won’t recur, TTM FCF is actually ~$160 million and accelerating.
By these peer companies, PRDO is undervalued by 3-4x. A tremendous opportunity. And even more pronounced knowing LAUR is basically hoping to grow the bottom line by shrinking the top line (potentially risky) and is heavily exposed to foreign currency revenues moving against them, along with heavy exposure to Central and South American countries with arguably more risky exposure to coronavirus outbreaks and shaky macro economies.
STRA just reported basically flat guidance for the remainder of the year on unencouraging enrollment expectations. Note that their flagship brand has 70+ physical campuses around the country (all closed) and have moved online. A requirement (moving online) that required little change for Perdoceo as they were largely online-only already. To this point, I think investors can now reasonably segregate higher ed programs and services based on those that require or still have a large physical footprint and associated lease obligations vs. those that don’t.
Online is the future of almost everything, but not yet so in the mind-share of most U.S. higher ed investment. But what if we compare Perdoceo to two fully online education stocks.
|Company||Enterprise Value||TTM FCF|
|PRDO||$677 million||$122 million (but adjusted is $160 million)|
|TWOU||$2740 million||-$20 million|
|CHGG||$10820 million||$126 million|
If Perdoceo were valued similarly to either, PRDO would be trading at over $200 as opposed to $15. And this point should not be easily lost. PRDO has higher revenues, 2020 cash flows, and is growing cash flows faster, yet trades at a small fraction of either.
It is this author’s belief that full-year 2020 free cash flows could exceed $200 million. They are already at $106 million in 6 months and accelerating. Even late last year, analysts significantly understated 2020 as exampled on the Q3 earnings call where one lead analyst forecast full-year 2020 free cash flows of only $100 million. They are clearly moving much faster than this, and the back half is quite strong, especially Q4, which tends to be the company’s best quarter.
If they perform as such, they will be besting nearly all other peer companies while trading at a fraction of them. Examples include Adtalem (ATGE) (EV $1900 million / TTM FCF $128 million), Laureate (LAUR) (EV ~$3700 million / management projected 2020 FCF of $150 – $180 million), Strategic Education (STRA) (current EV around ~$2100 million / FCF around $165 million)
Perdoceo’s Go-Forward Strategy
Perdoceo’s business plan is to quietly and smartly invest in organic growth projects that improve their student’s experiences.
Examples of organic projects that improve student experiences include creating phone apps for both institutions (same app, different branding) that are heavily used by students, faculty, and staff. Both apps including messaging features that are heavily used and make the student experience far better than competitors or other traditional higher-ed institutions.
One way to understand this. These apps have both received heavy downloads on the Apple and Android app stores and have excellent reviews (> 4.5 stars). Competing companies in the space and the vast majority of public/private schools are not mobile ready, and those that are, generally offer apps that have many more student complaints and basic functionality/bug issues.
Other examples of organic growth projects the company has pursued in the last 10 years include adaptive learning technologies and testing technologies that allow students to not have to relearn things they already know. I am not aware that any other institution in the country has either technology to the same scale and quality.
These technologies would likely take years for most schools to develop if they had the wherewithal, political, and technology capabilities to do so in the first place.
- Make strategic, bite-sized, tuck-in acquisitions, that are near-term accretive and synergistic as far as growing enrollments and bringing in new programs without the years and expense of typical new program approvals
Early this year, Perdoceo purchased Trident International, an easily afforded, accretive acquisition that has pushed new and total enrollments up substantially and also brought numerous new graduate-level degrees into AIU (one of the company’s two operating units).
In contrast to Strategic Education M&A activities, Trident was purchased for ~$40 million and was easily purchased with cash on hand (PRDO paid for it in a single quarter while still growing cash balances), whereas Strategic recently announced they are spending their entire cash balance and more (~$525 million cash on hand for a ~$650 million acquisition).
It is this author’s opinion that Perdoceo management is on the lookout for similar tuck-in purchases that are near-term accretive and positive for all stakeholders. The current market and related COVID-19/online trends should play very well to this strategy – acquiring on the cheap, quality higher education tuck-ins where Perdoceo’s online platform and technology leadership could rapidly bring strong returns for both students and investors alike.
What to Watch For
- Changes in the regulatory environment
Probably, the biggest thing to watch for today would be significant changes in the regulatory environment. While this author feels these risks are probably overstated – they are risks. The company, founded in 1994, has experience operating under both parties. While a Democratic win this Fall would be more negative, one could argue that the regulatory environment has almost never looked better, with the rollback of almost all Obama era rules in the last four years. While some changes could occur more quickly, many Department of Education rules require negotiation and would take 2 to 3 years at the earliest to implement.
Also, there appears to be an increasing window for operators like Perdoceo to operate as OPMs (online program managers). Outside (for-profit) company relationships are becoming very common among public and non-profit schools, whereby these institutions outsource many aspects of their operations to gain efficiencies. It is this author’s belief that a similar arrangement would be possible for Perdoceo.
Perdoceo reported record Q2 results continue a trend of outperforming management expectations. The company as a whole is exhibiting very stable and accelerating growth characteristics with a strong emphasis on free cash flow generation. Unlike other schools, PRDO’s legal and transformation process is largely complete. The current environment portends very favorably to PRDO which is in a strong cash position of $345 million (they also have no debt), and offer a product that basically all other schools in America are scrambling to provide – a high quality, online experience.
The company was already looking very favorable in the past, but how much more so today with the impacts of COVID-19, likely to be felt for years in the higher education space.
Whereas other sectors have been rapidly, and even foolishly bid up for their “COVID-19-friendly” business models, only some stocks (looking at you TWOU and CHGG) have received similar attention. Perdoceo is similarly positioned to benefit, but from a financial perspective, capitalizing much faster.
Higher education tends toward counter-cyclicality, and in PRDO’s case, is fully-online and mobile-friendly, in a sector that is a giant (TAM of over $500 billion annually), that has historically basically underserved by technical innovation and progress.
Perdoceo has re-imagined itself for the future, and the current operating environment has significantly pushed forward the company’s competitive advantages, of which there are many.
Outperformance, as was reported this week, will only go unnoticed for so long before Mr. Market starts ascribing peer and growth multiples to PRDO that are suitable and far higher than today.
Disclosure: I am/we are long PRDO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.