When it comes to for-profit educators, Grand Canyon Education (LOPE 6.91%) is not your run-of-the-mill operator. The school started as a private nonprofit Christian school that approached Wall Street in 2004 after running into financial difficulties. And it's also the only for-profit institution that has Division I athletics and has been featured on the ESPN.com's front page.
The company reported fourth-quarter earnings this week that built on momentum from the third quarter and blew past even the most bullish estimates. But it was a piece of news that surfaced a couple of months ago that investors should really be paying attention to: The school may transition back to a non-profit status in the coming years.
Grand Canyon Education earnings: The raw numbers
But before we delve into the details of what might happen in that case, let's look at the headline numbers.
|Metric||Q4 2017||Q4 2016||Growth|
|Revenue||$271 million||$245 million||11%|
|Free cash flow||($3 million)||($15 million)||Narrowed by 80%|
The company benefited from recent changes to the corporate tax code, with deferred taxes resulting in a $10.7 million one-time benefit that bumped net income substantially. Without the benefit, net income would have climbed a still healthy 20%.
Given the composition of a for-profit school's calendar, it's also worth noting that free cash flow for the entire year jumped from a loss of $1 million in 2016 to a gain of $181 million in 2017. That's remarkable progress that also helps explain why the company's net cash position grew 118% over that time frame to $277 million. Simply put, Grand Canyon has finished buying up the land it needs to expand, and now the extra cash is flowing to the balance sheet.
Just as encouraging is the leverage that management has been able to exercise. While revenue was up 11% during the quarter, only the advertising budget grew at a faster, 13%, pace. Operational costs for construction, admissions, marketing, and general and administrative expenses all grew at 7% or less. In short, the school is growing into its base.
Just as important, the lifeblood of any for-profit education company -- enrollment -- continued to show strong trends.
|Enrollment Type||Q4 2017||Q4 2016||Growth|
It will be interesting to see if the school's marquee Division I basketball program and state-of-the-art facilities are able to drive enrollment up even further without requisite increases in advertising and marketing.
The school has applied to The Higher Learning Commission, its accrediting agency, to once again obtain nonprofit status. The final form of the application was filed on Dec. 18. Not only would doing so help the school avoid the ugly stigma associated with for-profit schools, but it would become eligible for tax breaks as well.
The details are far from clear, and the process for making this transition is not short. If it were to happen, Grand Canyon University would be a nonprofit entity run by a president who is elected by an independent board of trustees. The university would obtain and own the campus buildings, academic departments, student services, and athletic programs.
Grand Canyon Education -- the remaining for-profit arm -- would then sign a long-term contract, probably for 15 years, with the university to provide marketing, curriculum development, recruiting, counseling, accounting, and HR services. We don't know what the immediate impact for shareholders would be, and the U.S. Department of Education would have to approve the deal if it gets the thumbs-up from The Higher Learning Commission.
Based on the stock's Feb. 21 closing price, shares for Grand Canyon now trade for 21 times trailing earnings and 24 times trailing free cash flow. For the 2018 fiscal year, management expects to continue leveraging the company's success, with earnings per share expected to jump 11% to $4.69 on revenue growth of 8% to $1.05 billion.