This article is part of our Rising Star Portfolios series.
When I first bought shares of for-profit educator Bridgepoint Education
A short time later, the Department of Education released its new regulations, and investors realized that they were not as onerous as feared. Shares moved up as much as 38% over my purchase price, and expectations for future growth dramatically improved as a result.
"Then depression set in"
The price has fallen rather dramatically since then. Two items seem to share culpability.
First, Warburg Pincus, owner of about two-thirds of Bridgepoint's stock, filed a shelf registration to sell up to all of its shares. "Oh, no! The majority shareholder is cashing out! They must know something we don't! Sell, sell!" Heh, typical. You may think I'm being a bit harsh in my criticism, but on the trading day after that filing was made, Bridgepoint's share price fell 11.4%.
What I believe is happening is that Warburg Pincus, the private-equity company that helped launch Bridgepoint and bring it public, is executing its exit strategy after a profitable investment, not abandoning a terrible investment. It's made a ton of money, and it's time to move on to other opportunities. That's its business model, after all.
Expecting too little
Second, on Aug. 2, Bridgepoint reported second-quarter earnings and changed its guidance for end-of-year enrollment numbers, lowering the lower end of the range given. This was a big deal to analysts, as five of the eight on the conference call asked questions about it. It's important because enrollment obviously drives revenue at these companies. Worries are that declining enrollment is an industrywide trend: DeVry
This is indeed a serious issue, but I believe the market has overreacted, helped by what else is going on in the economy right now. Free cash flow, which this company pumps out by the bucket full, over the past year is actually higher than it was before Bridgepoint reported, and the price is down below when I bought shares the first time. That translates to even lower growth expectations priced in than when everyone was worried about harsher regulations. It works out to be expected declines of 7.2% annually for five years, 3.6% for another five years, and then no growth forever (discounted at my usual 15% hurdle rate), much lower than the -0.9%, -0.4%, and 0% (same time periods) expectations from earlier.
If Bridgepoint manages to never grow FCF from the current level again, the shares would be worth $30 today, about 40% higher than where they are now.
The market had a messed-up expectation over the severity of the regulations, and I believe it is just as messed up today, thanks in part to the fear many are feeling. Therefore, I'll be putting another 2% of my Rising Star portfolio into Bridgepoint come Monday.
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