Rising Star Buy: Bridgepoint Education

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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.

The business
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.

If you're looking for more great opportunities such as this, follow me on my discussion board and follow me on Twitter (@TMFRoyal).

Jim Royal, Ph.D., does not own shares of any company mentioned. The Motley Fool owns shares of Bridgepoint Education. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 16, 2012, at 6:48 PM, xetn wrote:

    What happens to BPI if the federal student loan program collapses? Will they make their own loans?

    At what rate and what term?

  • Report this Comment On May 17, 2012, at 3:48 AM, lowmaple wrote:

    what happens when the sky falls

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