Why K12 Shares Plunged

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What: Shares of K12 (NYSE: LRN  ) were getting sent to the principal's office today, falling as much as 39% after the company lowered its guidance for fiscal 2014, which ends next June.

So what: The alternative online educator said enrollments increased 5.7% to 128,550, below its own expectations, and it sees full-year revenue of $905 million to $925 million along with operating income of $53 million to $57 million. That was well below the analyst consensus of $988 million in revenue, while operating income estimates were about $60 million. K12 noted that it did have an 11% increase in applications, but problems in its enrollment centers and delays in open enrollment led to a lower conversion rate. The news was greeted by downgrades from BMO Capital Markets and Robert W. Baird, both to neutral.

Now what: K12 announced a conference call tomorrow at 4:30 p.m. EDT, during which it will provide full details on its guidance. Until then, we can only speculate as to the performance issues in its enrollment centers that caused the poor conversion. Still, the solid increase in applicants seems to mitigate the significant guidance cut, as these problems may just be temporary. With a high valuation, the stock was set up for a steep drop on disappointing news, but its P/E is much more reasonable now at 26. I'm still wary of its business model as it seems subject to potential regulation, and may be benefiting from a gap that traditional education systems could fix, but the current price seems like a relative bargain. Make sure to check back after tomorrow's conference call for more info. You can do so by adding K12 to your Watchlist here.

This stock is at the head of the class
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  • Report this Comment On October 09, 2013, at 4:41 PM, Risky88 wrote:

    It doesn't help that these so called "schools" spend more on marketing than the actual education.

  • Report this Comment On October 09, 2013, at 10:57 PM, platonicbomb wrote:

    Did you read Tilson's short thesis? http://seekingalpha.com/article/1707192-an-analysis-of-k12-a...

    I did and bought $30 Oct puts on LRN. Yesterday they gained about 1300%. There is no need to speculate about anything... it's all out there.

    I'm surprised the Fool recommends this company. I won't repeat Tilson's argument here, but go check it out and you'll see that enrollment is not the issue.

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