Shares of for-profit educator K12 (NYSE:LRN) shot up by as much as 30% last week as the company reported earnings that came in ahead of expectations. While that sounds great for investors, it's important to put the jump in perspective: The company is still sitting 46% below where it was in June 2014.
Does last week's move mean the company is finally out of the woods, or is this just a temporary blip on a downward slope for K12? The answer: It's tough to tell.
First, here's why investors got excited
Besides being mercilessly beaten down over the past seven months, there were definitely some solid reasons for investors to be excited by last week's earnings release.
From a numbers standpoint, both revenue and earnings came in above expectations. The company registered $231 million in sales while offering shareholders roughly $0.33 per share.
Furthermore, management sounded extremely upbeat when it came to its two primary lines of business: managed and non-managed schools.
Managed schools -- where K12 is responsible for largely all of the education process of enrolled students -- show a promising future, according to company CEO Nate Davis. There has been "significant school development work occurring at both the state level and the school level." Davis believes "these efforts are in conjunction with our efforts to expand enrollment in our existing partner schools; we will support long-term growth in the managed public schools business."
Furthermore, the faster-growing line of business -- non-managed schools, where K12 usually provides online content and an online platform for learning -- also showed strong tailwinds: Revenue in the segment was up a whopping 65%.
Davis said that increases in state funding for online learning programs, mandates for online learning in several states, and schools desiring specialized courses will all help non-managed programs to continue growing at a brisk pace.
But there's still a long way to go
While even a for-profit education skeptic like myself has to admit that there's really a lot to like in K12's release, the company is still facing significant challenges. The most important thing to understand is that while K12's non-managed schools are currently growing by leaps and bounds, their enrollment and revenue numbers still pale in comparison to managed schools.
Just as important, enrollment numbers for managed schools were actually down 3.9%, which is less than the company predicted, but not a good sign either way.
In reality, K12's business of providing content and an online platform makes much more sense over the long run -- as the ethical and logistical problems of completely running a for-profit school can often land companies in the crosshairs of negative public opinion.
That business, however, brings in far less revenue per student than running a virtual school on one's own. Over the last three months, K12 collected $1,692 per student in its managed programs. Its non-managed programs pull in just one-third the amount per student: $565.
Management can talk until it's blue in the face about growing non-managed enrollments, but if the defection of students continues in managed programs, it's doubtful revenue numbers could possibly hold steady.
In the end, K12's price reflects that, as it now trades for just 10 times free cash flow. If you think the non-managed programs can take off -- or if there's a reversal in the future for managed programs -- then this would seem like a bargain price. If, however, you think K12 will meet the same fate as its higher education brethren, the stock could still have tough times ahead.