Earlier this week, Bridgepoint Education (NYSE: BPI ) revealed that the Western Association of Schools and Colleges had approved the company's Ashford University application for accreditation for five years. Investors had been concerned about this accreditation issue for the last year or so, and shares jumped on the news. They're now up about 50% from where my Special Situations portfolio bought in late April.
But guess what? Despite the price rise, the stock has been significantly de-risked, it's cheap, and it's time to buy more before a future run-up. So my Special Situations portfolio is adding another $1,000 to the allocation of this for-profit educator.
All the news
The accreditation news was the biggest overhang on the shares, and it was with a sigh of relief that I heard the word. But with the worst-case scenario off the table, the stock is arguably cheaper than it was before. That's because now the company has a range of value-creating actions.
First, Bridgepoint also announced that it has targeted $85 million in cost cuts. The company suggests that these cuts "will not sacrifice the commitments and investments we made to improve student learning, success and outcomes." At Bridgepoint's trailing effective tax rate of 38.2%, that translates into $52.5 million in after-tax profit, or nearly $1 per share. That's a significant cost-cutting program. Those effects won't come into full effect until mid-2014, but until then, the income statement will be bolstered by ongoing cost reductions.
Of course, that cost savings is in addition to whatever the company would earn otherwise. Maybe that's $1 per share, maybe $1.50. The company is declining to give guidance on its upcoming conference call in early August, but noted that enrollments should hit an inflection point in the fourth quarter and head upward.
Second, the company has nearly $429 million in cash and short-term investments, as well as more than $96 million in long-term investments. Plus, it has no debt. That's not a capital structure that maximizes shareholder value.
With few other likely uses for that cash, it should be returned to shareholders in some form or other. That could include buybacks, or a special dividend, and ideally would include some type of leveraged recap, as well. Issuing debt, and then getting that money to shareholders through buybacks or a special dividend, would show that management is serious about creating value.
Encouragingly, there is a precedent for buybacks, with the company having spent a total of $135 million in 2010 and 2011 on shares. I'd love to see more of this, and at a more aggressive level. In any case, this type of cash should not be sitting on the balance sheet.
In short, this stock should be worth a lot more.
Foolish bottom line
Despite the run-up in shares, Bridgepoint still looks like a great special situation. So I'll be adding $1,000 of the stock to my Special Situations portfolio.