The Market Is Cheering K12, Inc's Earnings, but K12 Needs to Do More

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of K12 (LRN 8.64%) rose as much as 10% on Tuesday after the for-profit education company beat Wall Street estimates with regard to revenues and earnings per share in its fiscal third quarter. At 3:15 p.m., shares were up 8.7% from the previous close.

So what: Here's how the numbers shake out:

Source: Thomson Financial Network, K12

K12 came in ahead of the consensus estimates in the third quarter and it was also above its own guidance range for revenues ($230 million to $240 million) and operating income ($27.4 million versus a range of $20 million to $24 million). However, note that the top of the company's revenue guidance range for the current quarter is slightly below the current consensus estimate (line three in the above table.)

Third-quarter revenue growth in the Non-managed Programs (+38%) part of the Public Schools Program segment is impressive, but the truth of the matter is that this business is starting off a very small base, while Managed Programs (+4%) represents the overwhelming majority of the firm's revenues -- to the tune of 87%. Managed Programs is the part of K12 that has attracted negative attention in the past due to questionable enrollment practices.

Now what: K12 has the makings of a decent business. However, as a general rule, I'm not terribly comfortable with for-profit education companies because they have a terrible history of allowing short-term incentives to run contrary to their long-term mission – which ultimately invites regulatory scrutiny and, sometimes, scandal. While it is attempting to turn things around, K12 is itself part of this sorry history. The shares don't look outrageously expensive, even after today's "pop," but they're nowhere near cheap enough for my taste.