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At about 6.8 times 2012 earnings, Bridgepoint Education (NYSE: BPI ) is trading at a price that suggests it will grow no more forever. But the company is solidly profitable and management has issued a share-repurchase authorization, a move that could potentially lead to a short squeeze. For these reasons, I'm buying shares for my Special Situations portfolio.
Bridgepoint offers bachelor's, master's, and doctoral programs at two universities: its Ashford University in Iowa and University of the Rockies. But unlike many players in the space, Bridgepoint is solidly profitable and expects to continue its profitability. Analysts estimate earnings of $2.54 per share for this year, putting the P/E at a bargain-basement multiple.
The company sits atop $327 million in cash -- nearly one-third of its market cap -- and has no debt. It continues to grow its student population, so that even if its students aren't as profitable for Bridgepoint as they once were (due to recent regulatory changes), it can make up the difference in volume. Plus, unlike peers, Bridgepoint is in compliance with the new regulatory regime.
Why I'm buying
All this would make the stock an opportunistic value. But I want to really focus on what makes this stock a special situation. And that revolves around the company's recently announced authorization to repurchase up to $75 million in shares.
At about 7.5% of the entire company, that's a sizable repurchase. But about two-thirds of the total shares continue to be owned by Warburg Pincus, an investment fund that has indicated its willingness to unload shares in the past, but has yet to. With only about one-third of its 52.4 million shares floated and nearly 10 million shares short, the stock has the potential to face a short squeeze.
At current prices, Bridgepoint's repurchase would total about 4 million shares taken off the market. That's more than 20% of the actual floated shares, an amount that could put a strain on the market. So there's a huge catalyst.
Even if that fails to materialize, we will still own a very cheap company that produces a ton of cash and has been taking steps to increase shareholder value. That's a situation with a lot of upside.
So tomorrow I'll be buying $1,000 of Bridgepoint Education for the Special Situations portfolio.