In the last few years, for-profit education has been an unloved industry, scorned by analysts and the public alike. The companies have been accused of saddling up their students with high debt loads and then releasing them into the workforce with few job prospects and a degree not worth the paper it's printed on. For-profit educators have developed a reputation for shady recruiting practices, cheating scandals, and misleading marketing. As a result of the uncertainty surrounding these companies, valuations have plummeted from their premiums just a few years ago. One company, however, remains richly valued compared to its peers. Is this an outlier, or just the last pillar to fall?
Lately, even nonprofit, traditional educators have come under fire for their high costs and poor results, but it's the for-profit group that is greatly frowned upon. It's a sharp contrast to a few years ago, when companies like Apollo Group (NASDAQ: APOL ) were trading at high multiples (Apollo used to fetch near $80 per share, compared to $17 today). One might think that as a result of the recent recession, more people would go back to school, but companies' earnings certainly don't support that thesis. For the last three years, Apollo's earnings have shrunk, while competitors such as DeVry have swung up and down, but still ended lower.
For-profit education is at the mercy of government regulation, and things don't look great. The Obama administration continues to press for harder terms on these colleges that some say have contributed to the number of struggling Americans in tough economic times while robbing citizens of precious tax dollars.
It is for these reasons and more that Apollo trades at less than seven times forward earnings, nearly identical to Bridgepoint Education, and close to ITT Educational Services at 6.02 times forward earnings (and just 2.65 times trailing earnings).
There is one for-profit educator, though, that seems to have some immunity -- Grand Canyon Education (NASDAQ: LOPE ) . I, for one, do not understand this given the history and current condition of the company.
A brief history
Grand Canyon operates a physical school in Phoenix (not be confused with Apollo's University of Phoenix) as well as a large online degree program.
The school was actually a nonprofit for many years until it approached bankruptcy in 2006. After a complicated and costly transition led by two brothers with a history of entrepreneurship in education, the company went public as a for-profit educator. Upon market entry, 75% of IPO proceeds ($108 million) went to senior shareholders, with the balance ($20 million) going into the business. In the company's very first annual report, auditors found material weaknesses in the financial statements, which were then amended as far back as 2005.
Like most for-profit educators, Grand Canyon had a rising ratio of profits directly from the U.S. Title IV program -- a student loan service. In 2006, that number was 67.9%. By 2010, it had risen to 84.9% before the company took steps to reduce its near complete dependence on U.S. subsidies. If the ratio rises above 90%, a school's accreditation is suspended and it is ineligible to receive further funding. Grand Canyon's ratio currently sits at 80.3%.
Grand Canyon is accredited by the Higher Learning Commission -- an institute that the U.S. Inspector General recommended for termination by the Department of Education in 2009. Though it still exists to this day, if the HLC were to ever be dismantled, Grand Canyon would have to scramble for new accreditation -- a multiyear process.
There are more issues regarding the company, including nearly 5 million shares sold by the company's buyout brothers since 2009 at prices much lower than today's. But, for the sake of brevity, let's get right to the point. What does Grand Canyon look like today?
To its credit, Grand Canyon has been bucking the trend of decreasing enrollments in post-secondary environments -- both nonprofit and for-profit. Enrollments grew substantially due to the company's hybrid model of both online and physical programs. Operating income rose more than 38% from 2011 to $114.1 million.
The company is targeting high single-digit to low double-digit enrollment growth long-term, while acknowledging in its 10-K the very difficult environment and possible further government regulation.
The very best thing the company has going for it is its campus, which adds some degree of legitimacy in the eyes of investors and analysts. Campus growth was up 50% year over year, but that is partially due to a major increase in capacity and the school's recent athletic successes.
Yet even in a year when Grand Canyon appears to have soared beyond its competitors, its executive chairman continues to sell shares at an unprecedented pace. Since June 2012, Brent Richardson has dumped 663,000 shares of the company at prices ranging from $15 to $23. As one of the company's largest shareholders and someone who originally brought the company public, it is interesting that he believes the stock is worth selling at those levels, given the growth prospects, and at a discount to today's price.
On the surface, Grand Canyon appears to be doing very well, especially among its peers. Numbers are up across the board. But considering the rocky history since even before its IPO, rampant insider selling, questionable accreditation, possible government intervention, and its substantial price premium to its peers, I find Grand Canyon to be a terrible long-term investment. Shorts may want to pay attention here, but should be aware that the market can remain irrational longer than you can remain solvent. To all, I recommend extreme caution when looking at this stock.
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