Rising Stars Trade: Buy More Bridgepoint Education

You've heard of sandbagging guidance figures, but how about this: To hit the company's 2011 guidance, Bridgepoint Education (NYSE: BPI  ) will now have to lose more than 5,000 students by the end of the year. For a company that has grown its student base by more than 17-fold in just four years -- and added 34% more students last quarter -- that is just ridiculous.

When we first purchased shares of Bridgepoint in April, we were primarily betting that it was undervalued relative to an overvalued Strayer Education (Nasdaq: STRA  ) , which we shorted.  Last week, with Strayer down about 20%, I covered our position and locked in our profit. That left our Bridgepoint shares unhedged, but even with our shares up about 20%, the stock remains dramatically undervalued.  Today I am adding another 4% to bring our total allocation to 7%.

What's new?
Bridgepoint's first-quarter results, which were released since we first bought shares, served to strengthen my thesis on the company. Bridgepoint brought in 22,000 new students in the quarter, pushing the total to 88,252. In just the first three months of the year, the company blew past management's stated expectation of reaching 82,000 to 83,500 students by year-end. Revenue grew 47%, while instructional, marketing, and administrative costs were all roughly flat per-student and lower as a percentage of revenue when compared to full year 2010. This continued growth allows Bridgepoint to take advantage of increasing cost advantages of scale. Those scale advantages materialize in higher margins: Bridgepoint's operating margin has grown every year since inception, and the 37.5% posted last quarter is the highest ever.

Operations aside, Bridgepoint is now sitting on a small mountain of $300 million of cash and no debt, meaning that a whopping 29% of its market cap is now in cash. With an enterprise value of $751 million, the company is trading at a scant 2.9 times EBITDA.

One risk not to overlook
The risk I consider most probable is related not to operations or regulations but to Warburg Pincus, the private equity firm that owns 65% of Bridgepoint's shares. Warburg first got involved with Bridgepoint in 2004, providing the funds to get the company off the ground. Five years later, they took Bridgepoint public, and two years further on now, I would not be surprised if they are getting antsy about their investment's return.

The executives at Warburg likely see exactly what we see: an operationally stellar business sitting on $300 million of cash and no debt sporting a valuation normally suggestive of imminent bankruptcy. Those characteristics make for an exciting investment for us—but they also make for an appealing private equity takeout target. Adding to this speculation, Bridgepoint has repurchased $55 million worth of shares in the past year and, after additional authorization in May, now has the go-ahead to buy back a further $80 million. Since there are only about $360 million of shares that Warburg doesn't own, that $80 million authorization is a big number, and it would not surprise me in the least if Warburg was buttering up Bridgepoint for a tender offer down the road.

Even still, keep in mind that the risk a tender offer poses is to cut off our upside, not take the floor out from under us. We'd certainly prefer Bridgepoint to stay public until our shares realize their value, but a tender offer would likely come with some premium. It's not ideal, but I could live with that outcome.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here. 

Alex owns shares of Bridgepoint Education. The Motley Fool owns shares of Bridgepoint Education. Motley Fool newsletter services have recommended creating a call spread position in 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.


Read/Post Comments (6) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 24, 2011, at 4:15 PM, jimmy4040 wrote:

    What is your next article going to be "Invest With Rising Star Bernie Madoff"? Absolutely disgraceful!

  • Report this Comment On May 24, 2011, at 5:17 PM, moore34 wrote:

    The for-profit schools are governed by the "triad of state licensing, institutional accreditation, and federal financial aid eligibility".

    Bear:

    The states are suing.

    The accreditation is throwing BPI "under the bus"

    The senate has subpoenaed BPI

    Bull:

    The omb has 90 days to respond to the new regulations, but has a favorable view of the 2010 draft.

    See my blog .. http://bit.ly/jrJO1O

  • Report this Comment On May 24, 2011, at 9:15 PM, XMFPapester wrote:

    Jimmy,

    Thanks for adding to the evidence that investors paint all for-profit education companies with the same brush. Rock on!

    Cheers,

    Alex

  • Report this Comment On May 25, 2011, at 12:39 AM, jimmy4040 wrote:

    Alex:

    Bridgepoint is considered one of the worst of the worst.

    You wrote:

    "Bridgepoint brought in 22,000 new students in the quarter, pushing the total to 88,252. In just the first three months of the year, the company blew past management's stated expectation of reaching 82,000 to 83,500 students by year-end. Revenue grew 47%, while instructional, marketing, and administrative costs were all roughly flat per-student and lower as a percentage of revenue when compared to full year 2010."

    Exactly how do you think they grew revenue 47% while keeping costs flat? It's because education is not the business model. It's all about securing loans for the students. Heck they don't even care if they BECOME students as long as they take out the loans!

    This is just like the sub-prime industry where people were recruited to take out loans they couldn't afford and couldn't pay back. Almost 90% of Bridgepoint's revenue comes from student loans, which the government will (hopefully) cut off relatively soon.

    Prove me wrong. Show me their graduation rate from a governmental source. Show me the default rate on their student loans.

    Just this week more subpoenas

    "Bridgepoint Education Inc, a provider of post-secondary education services, said in a filing that it received a subpoena from the attorney general of the State of New York.

    According to a filing with the Securities and Exchange Commission, the San Diego-based company said the subpoena relates to the attorney general's investigation on its compliance with certain New York State consumer protection, securities and finance laws.

    Bridgepoint Education, which runs the Ashford University and University of the Rockies, said the attorney general has requested from the company and its academic institutions documents and detailed information dating back to March 17, 2005.

    The company said it is evaluating the subpoena and intends to comply with the attorney general's request.

    Bridgepoint has also come under scrutiny from the U.S. Senate for a 60 percent-plus drop-out rate in two years, while its spending on students plunged.

    Bridgepoint is currently facing class action litigation in federal court for the Southern District of California over allegations that it made misrepresentations to recruit students and over-charged the federal government for financial aid."

    You column was either uninformed or deliberately duplicitous. I'll let you tell us which one!

  • Report this Comment On May 26, 2011, at 9:34 AM, moore34 wrote:

    The Ira Sohn Conference an investment idea contest was held. The winner was Bridgepoint (BPI)

    See my blog .. http://bit.ly/kRt9o7

    (h/t) for MarketFolly

  • Report this Comment On May 26, 2011, at 12:41 PM, jimmy4040 wrote:

    Yes I saw that. There's kid who will definitely wind up either under indictment somewhere, or a billionaire hedge fund manager.

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