An Enormous Red Flag for Bridgepoint Education, Inc. Investors

Bridgepoint looks cheap, but investors need to be aware of some crucial missing details.

May 29, 2014 at 10:13AM

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Source: Quozio

The Great Recession was mighty kind to for-profit education companies. Just as the economy tanked and jobs disappeared, for-profit schools saw both their enrollment and share prices explode.

If you think about it, it makes sense. Instead of sitting around all day doing nothing, the unemployed decided to further their education, and thereby increase their earning potential in the future.

Bridgepoint Education, Inc. (NYSE:BPI), along with a host of other for-profit educators, was a huge beneficiary. The company went public amid the for-profit bonanza, and saw its share price triple between May 2009 and July 2011. The company certainly had the enrollment figures to back up the enthusiasm.

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Source: SEC filings.

But then, the tide went out—and many were swimming naked
Things started to go south quickly for the entire industry in late 2010. Students were dropping out, not paying off their debt, and were unable to find gainful employment. Schools were relying heavily on government programs and—as the GAO found out in an undercover investigation —appeared to be participating in predatory lending.

As a result of an in-depth dive into the sector in 2010, I found Bridgepoint to be one of the better-run for-profit educators, but still believed the investment to be dubious. A follow-up conducted last year came to much the same conclusion.

If we simply look at both overall and new-student enrollment since the start of 2012, you can see why Bridgepoint's stock has lost over half of its value since hitting all-time highs in 2011.

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Source: SEC filings. New student enrollment's CAGR reflects trailing twelve month new-student enrollment for FY 2012 and FY 2013. Q1 2014 new student enrollments is an estimate of 15% reduction based on management comments.

So is it a buy today?
Based on a lot of traditional metrics, Bridgepoint looks like a pretty solid stock at today's prices. The company expects business to pick up again during the second half of 2014. It has $219 million in cash and no debt. And based on 2013 numbers, Bridgepoint's stock trades for just 10 times free cash flow.

However, though several premium services here at The Motley Fool still believe in the Bridgepoint investment thesis, I don't count myself as one of their supporters. The company has to spend a lot more to retain students and make sure they're successful than in years past. A growing jobs market is taking away some incentive to go back to school. And traditional schools are beginning to offer much cheaper on-line alternatives.

But one of the biggest reasons I'm not a fan right now has to do with—what I believe to be—a glaring omission from the company's last earnings report.

Quite possibly the most important metric for investors of for-profit companies to be aware of is new-student enrollment. While overall enrollment changes are a good proxy for how well schools do at holding onto their students all the way through graduation, new student enrollment lets you know whether or not the value proposition the school is offering is becoming more or less popular with potential students.

Earlier in May, when Bridgepoint released its first-quarter results, they neglected to include this crucial metric. The only nugget we got from CEO Andrew Clark was that "In the first quarter, we...had negative new enrollments in the double digits." The company said it expects new enrollment to turn positive on a year-over-year basis during the second quarter, but I'm left dumbfounded as to why an actual number wasn't included.

The pessimist in me believes it's because new-student enrollment was awful. It's impossible to know if that's the case, but "double-digit" declines leaves a pretty large range for conjecture.

More importantly, management's unwillingness to openly, honestly, and transparently let investors know how the company did on this crucial metric makes me openly wonder whether or not I'd be comfortable investing with management that leaves me in the dark.

In the end, Bridgepoint could be a great investment, but the combination of this omission, plus the major headwinds the overall sector continues to face, leads me to believe that there are better places for your investment dollars today.

Here's a good place to start: an idea from Warren Buffett
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Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of Bridgepoint Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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