- Currently, in America, there is a gap unemployed requiring higher-level education, and the amount of people in the workforce who are of higher education. This is a problem that need to be fixed quickly.
- This is where education companies like Perdoceo come in.
- This is great news for education and education service stocks and is the main reason why they are set to grow at a CAGR of 11.96% over the next 10 years.
- However, it is likely that we see high-growth, technologically advanced education service stocks like Perdoceo outgrow their peers/industry average.
- This investment (according to my valuation techniques) currently has room to grow by upwards of 107%.
- However, with big rewards there are typically big risks (although the risks here are not as large as other) which are highlighted at the end of this report.
Perdoceo's academic institutions offer a quality online post-secondary education online, through their blended-learning programs. Perdoceo has 2 accredited institutions (Colorado Technical University (CTU), and the American InterContinental University System (AIU).) that provide degree programs for associate, bachelor, masters, and doctoral levels. Perdoceo is committed to providing quality education that helps their learners advance in their careers.
On March 2nd, 2020, Perdoceo acquired Trident university, which they merged into their American InterContinental operations. This acquisition helped to provide a new framework for American Intercontinental, while allowing Trident to continue to serve their student population.
CTU provides industry-relevant education to their student population through innovative technology and experienced faculty, enabling students to pursue their personal and professional goals. CTU focuses on educating adult, non-traditional students seeking to advance their careers by offering programs in career-oriented fields such as healthcare management, cybersecurity, computer science, business, nursing, etc. CTU offers classes in Colorado at their Colorado Springs location, their Aurora location, and through online delivery.
AIU follows the same principals as outlined in CTU, however they focus on adult, non-traditional, and military learners. AIU focuses on personal, professional, and educational growth of their students and has committed themselves to upholding institutional integrity and ethics. AIU offers academic programs in the career-oriented disciplines of business, IT, education, health sciences, and criminal justice. AIU offers their classes at campuses in Houston, Atlanta, and Chandler, and also offers online course delivery.
The USA adult education system is currently falling behind, and the USA cannot compete with other countries economically if they do not improve the skills/education of their workforce. Additionally, adults without a high school diploma are 2x more likely to be unemployed than those who have completed high school. Lastly, 65% of all US jobs require education, yet 38% of the workforce has only a high school diploma or less.
All of the aforementioned factors contribute to the need of American adults to become educated. Luckily, Perdoceo makes it easy for adults to obtain quality and tailored education to make them ready for the workforce. This claim can be backed up through Perdoceo's corporate partners, these corporate partners are aware of the high-quality education Perdoceo has and would not be sending their employees to Perdoceo if Perdoceo was not producing favourable results.
The need for adults to become increasingly educated is a key driver of the projected CAGR of the adult and continued education market, which is expected to be 11.96% over the next 10 years.
Adult Ed Facts - United States - World Education, Inc.
What is the most recent global market size for continued/adult education? | Wonder (askwonder.com)
- Corporate Partnerships: Perdoceo has acquired many corporate partnerships in which they are able to connect with a whole new set of students who they would not have been able to connect with otherwise. The way these partnerships work is that corporations will pay (a discounted rate) to send their employees to one of Perdoceo's academic locations. Corporations are willing to pay for their employees to get educated as an investment in their workforce, and in return Perdoceo is able to generate revenue. In 2020 20.1% and 5.4% of enrollments at CTU and AIU respectively, came from corporate partnership agreements.
- Seasonality: The academic calendar has an impact on Perdoceo's quarterly revenues, because the school year typically takes place during Q3, Q4, and Q1, meaning that Perdoceo's revenues in Q2 tend to fall short. We can use this to our advantages when looking to enter a position into $PRDO, as they report Q2 earnings on August 7th.
- Share Buybacks: Throughout the fiscal year of 2020 Perdoceo purchased 1,400,650 of their common shares. Their average cost basis for repurchasing these shares was $13.40, which results in a total repurchase of $18,774,206.57 throughout the year. These purchases throughout the year inflated the shares by 2% over the course of the year. Furthermore, Perdoceo has been authorized since November 4th, 2019 to repurchase a max of $50M worth of shares, this agreement expires at the end of 2021. So far, they have only repurchased $18.77M, which leaves them a maximum budget of $31.23M to repurchase shares in 2021. This would equate to repurchasing 2,572,488 shares (at current prices) which would cause existing shares to inflate by 3.65%.
- Improving Financials: Perdoceo increased their revenues 9% YoY, increased their operating income by 65.3% YoY, increased their cash provided by operations by 146.24%, and decreased their operating loss by 31.61%. All of these factors contribute to better financial health and can help Perdoceo to retain more income and become more profitable.
- Acquisitions: As mentioned previously Perdoceo acquired Trident University for $43.8M in 2020. This acquisition and merger of Tridents operations into their AIU segment, cause AIU enrollments to grow at 37.3% YoY. Furthermore, Perdoceo estimates that this acquisition helped to increase AIU's revenue by 19.5% (or $46M), which gives the purchase an EV/Revenue value of 0.95, which is relatively cheap in the world of acquisitions.
- Equity Compensation Plans: Perdoceo currently has 1,227,074 common shares issuable upon excersize of outstanding options. Essentially, this means that during 2021 a maximum of 1,227,074 shares can be unloaded into the marker, which would cause a share dilution of about 1.75%. This is scary as an investor, however knowing that Perdoceo has $31.23M available to repurchase shares I do not see this as a problem as the share inflation from share purchasing is likely to exceed the share dilution from option exercises from employee compensation packages.
- Enrollment Growth: The total student enrollment figures for Perdoceo increased by 16.7% YoY, which lead to an increase in total university revenues of 9.4% and an increase in operating income of 65.3% (as previously mentioned.) By continuing to expand and acquire universities, Perdoceo can continue to grow at these rates and further increase their margins.
- Investments: Perdoceo has stated that they are looking to invest in their student operations, curriculum/course content, marketing, technology, additional mergers, and acquisitions, and to return capital to shareholders. By investing in these projects, Perdoceo will be able to decrease their cost of revenue and continue to maintain their growth rates achieved in 2020.
- Indebtedness: Perdoceo had no debt on their financial statements in 2018, however with their recent acquisition of Trident, they now have $43.4M in long-term debt. However, given their cash position of over $406.3M, I do not see their long term debt being a problem to their operations and long term vision.
- Student Enrollment: Students over 30 make up the biggest segment of students (62% of enrollment), this is then followed by students aged 21-30 (34% off enrollment), and lastly, students under 21 (4%). Additionally, business is the most popular course (76%), followed by IT (11%), and health education (13%). Lastly, majority of students at Perdoceo are studying for their bachelor's degree (66%), followed by their associate degree (21%), and lastly their masters/doctoral (13%). By using this information, we can conclude that the average student is over 30 and pursuing their bachelor's in business.
This is important because it shows the demographic of Perdoceo, which helped me when I was looking for information to include in the macroeconomic overview.
- Use of Artificial Intelligence (AI): Perdoceo has used/developed AI in order to streamline their process for prospective students who want to learn about Perdoceo. They developed an AI/machine learning chatbot which they named “Lucy”. Lucy has been able to automatically answer 90% of the question's future/interested student have. Now you may be asking “why is this important”, well the answer is because it can help Perdoceo cut the costs of hiring people to manage these questions, instead they can save money and time through Lucy.
- Intellipath: Perdoceo has also developed a platform to help their students learn. Intellipath helps to identify areas where students need more help and bypass areas where students are already educated, helping students to have more control over their academic progress. Students feel a stronger sense of confidence and learn at a deeper level through the applications of Intellipath. Personalized learning is changing education by measuring student growth and helping students understand based on their learning style, speed, and capabilities. Now again you may be asking “why is this important to their stock”, well I will tell you why. Having such a platform established, tested, and showing good results is important and a unique selling position for Perdoceo to gain more of the non-traditional, adult education segment. Furthermore, if students enjoy learning on the Intellipath platform, they will likely tell their friends and family how unique, effective, and tailored it was, which will help to generate free word of mouth marketing.
- Default Rates: Perdoceo has high student default rates at 18.8% and 18.5% for AIU and CTU respectively. This is worrying because they have already been forced to delay the disbursement of US Federal Loans by 30 days due to the default rate being over 10%. However, if the student default rate reaches 30%, then Perdoceo will have to establish a default protection task force, and if this default rate remains above 30% for 3 years in a row (or is above 40% for any given year), then Perdoceo will have to forfeit their Title IV (4) programs. This means that Perdoceo will have to withdraw from their educational programs and return funds to the government, which would be devastating to the company. However, since 2015 Perdoceo has been taking action and has gradually lowered their student default figures.
- AIU: As previously mentioned AIU operates in Houston, Chandler, Atlanta and online, AIU has an enrollment of 18,100 students, and has recently acquired/merged with Trident University. AIU accounted for $281.36M in revenue in 2020, this figure grew 19.5% YoY. Furthermore, AIU's operating income in 2020 totalled $30.83M, which represents an operating income margin of 11%.
- CTU: As previously stated CTU operates in Colorado Spring, Aurora, and online, CTU has a total enrollment of 24,600 students. CTU accounted for $405.5M in revenue in 2020, which increased 3.4% YoY. Additionally, CTU achieved an operating income of $138.5M in 2020, which translates into an operating income margin of 34.2%.
The WACC stays consistent in all 3 of the DCF models undergone. I achieved this 9% WACC through browsing through a variety of websites that estimated $PRDO's WACC to be between 8.5-9.1%. I chose the 9% level to be conservative and slightly pessimistic to achieve perhaps even lower than fair value valuations.
CAGR #1 (High):
I achieved this figure through averaging the growth rate of Perdoceo's historical EBIT values. By doing this I arrived at a CAGR of 29.96%, which I applied to my high estimate.
CAGR #2 (Middle):
I arrived at this figure through published industry research that stated the adult and continued learning sector was set to grow at a CAGR of 11.96% over the next 10 years.
CAGR #3 (Low):
I arrived at this CAGR by averaging their historical revenues over the past 4 years. By doing this I arrived at a CAGR of 4.82%.
I chose to take the average interest expense for Perdoceo and keep it constant over the course of each DCF model. This is because although there were increases and decreases in the revenue, the interest expense exhibited no predictable behaviors and as a result would be best left as a constant.
In their SEC 10-K filing Perdoceo highlighted that their effective tax rate for 2021 would be between 25.5-26.5%. As a result of this variance, I decided to use 25.5% in the high estimate, 26% in the middle estimate, and 26.5% in the low estimate.
When deciding who the best competitors are when doing the comps, I found some similar, small, and medium cap stocks, that are in the education and education services sectors. These stocks include: Adtalem Global Education ($ATGE), Stride Inc. ($LRN), Hailiang Education Group ($HLG), and Graham Holdings ($GHC).
Investment Valuation and Plan:
In order to value Perdoceo, I underwent 3 comparable analyses (EV/EBITDA, EV/Revenue, and P/E), as well as 3 DCF's to get optimistic and pessimistic valuations and draw correlations and conclusions from them.
DCF #1 (High/Optimistic Outlook):
I used the figures explained in the “valuation information” section of this report, the find the optimistic fair value for Perdoceo. By doing this, I arrived at a fair value per share of $50.45, which implies an upside of 308.52%. However, this seemed rather high (although not unfeasible), so I decided to undergo a neutral DCF model.
DCF #2 (Middle/Neutral Outlook):
Once again, I utilised the figures in the “valuation information” section in order to value Perdoceo. This DCF model yielded an implied upside of 83.55%, or a share price of $22.67. This is significantly more reasonable than the figure achieved in the optimistic model. However, I still wanted to undergo a low DCF, to the full picture.
DCF #3: (Low/Pessimistic Outlook):
Once again, I utilised the figures in the “valuation information” section to find Perdoceo's fair value. By doing this I arrived at a fair value per share of $16.78, which implies an upside of 35.89%. This is still a large upside, especially keeping in mind that it is the low estimate. Lastly, all of the DCF models prove that perdoceo is in fact grossly undervalued.
I decided to average the 3 results that I achieved through my DCF models. I did this as an attempt to eliminate any possible biases in the valuations. By doing this I arrived at a fair value per share of $30.87, which implies an upside of 149.93%.
In order to confirm the results, I achieved through my own DCF models, I decided to use Tracktak's DCF calculator. By doing this Tracktak estimated that Perdoceo's fair value is $21.05, or a 70.45% upside. Although this is quite lower than my DCF's results, they are still estimating that Perdoceo is vastly undervalued and presents a great investment opportunity. Furthermore, I believe that their DCF is too low due to the low CAGR the used (approx. 2%)
This multiple is commonly use to value and compare companies to their counterparts. By comparing this multiple to Perdoceo's competitors (listed above in the “competitors” section), I arrived at a fair value per share of $29.39, which implies an upside of 139.98% and is close to the results achieved through the DCF models.
This multiple is commonly used in acquisitions, or in companies that have a history of acquisitions. Knowing that Perdoceo has acquired Trident in the past and plans to continue acquiring universities to fuel their growth makes this multiple important. This multiple estimated that Perdoceo's fair value per share is $33.91, which implies an upside of 174.57% and is similar to the results achieved in the DCF model.
P/E is another multiple that is commonly used when valuing companies. Through comparing Perdoceo's P/E to that of their competitors, their fair value was estimated to be $21.02, which implies an upside of 70.20% and is similar to the Tracktak DCF result.
Every single valuation technique undergone indicates that Perdoceo is undervalued, however how should we play this?
I see any entrance into a position under $13 as a very good buy, as it increases the potential upside of such an investment, and there is no indication that this stock should be that low.
I would sell 50% of my position as soon as the price reaches $22, as the Tracktak DCF and P/E valuation hint at this level. Additionally, the average analyst price target for Perdoceo is $20-23.
I would then hold the remaining 50% of my investment until the price reaches the $30 level achieved in the average DCF and average comps.
By following this plan (assuming you buy in at the current price of $12.35), would yield a return of 107.32%.
- Share Buybacks: In the fiscal year 2020, Perdoceo bought back over $18M in shares. This caused a price increase on existing shares of 2%, this is because buyback inflate the price of existing shares. We know Perdoceo has a history of buybacks like the one in 2020, however, we also know that they have over $30M approved from the board to buyback shares before the end of 2021. Knowing their history, we can expect them to spend all of (or majority of) this budget to buyback shares, this could increase existing shares values by up to 3.65%.
- Acquisitions: Acquisitions can fuel the future growth of Perdoceo. If Perdoceo announces that they are acquiring another university, their stock price would likely increase (unless they are overpaying), as it will help future growth and they can afford to take on higher levels of debt.
- Improving Financials: Over the last couple of years Perdoceo has been able to consistently increase their revenues, EBITDA, EBIT and operating income/margins. If they can continue these levels of growth it will help to propel the stock closer to fair value. Furthermore, they have pledged to invest money into several improvements that will help deliver better service as well as minimize their costs. These investments should have a positive effect on the upcoming earnings releases.
- Artificial Intelligence: If Perdoceo continues to find ways to advance and implement their AI technologies they will be able to autonomize their business and incur less costs (thereby improving their margins).
- Student Default Rates: Perdoceo relies on their Title IV programs in order to maintain their operations, however, as mentioned before, they cannot exceed more than 30% default rates for 3 consecutive years or have one year with 40% or more student default rates. This is unlikely but still worth a mention.
- Privacy and Information Laws: Perdoceo is subject to laws surrounding their collection and use of personal information, and any theft, breach, or misuse of this information will adversely affect their business. Perdoceo has been subject to attacks and malware in the past, however they are constantly improving their systems, so this does not happen again.
- Indebtedness: As mentioned previously, Perdoceo has take on debt for the first time in many years in 2019. Currently they have over $40M in long term debt, however this is no problem as their cash reserves can cover this debt multiple times over.
- Variations in Financial Reports: As mentioned previously, Perdoceo does not typically perform well in Q2, and as a result we could see the share price decrease after they release Q2 earnings in August. However, this is not of concern to long term investors and is not that much of a risk.
- Equity Compensation Plans: Equity compensation plans dilute the existing shares on the market, and if Perdoceo has large employee compensation plans in the future, this may negatively affect the stocks price.
- Perdoceo fits perfectly into my portfolio's philosophy
- Small cap stock
- Drastically undervalued
- Has a good macroeconomic outlook
- Perdoceo helps to diversity the portfolio
- I am yet to implement an education stock into the portfolio and adding $PRDO can help to reduce the overall risk of the portfolio.
- Analyst targets
- I am not the only person who believes that this stock is wildly undervalued, there are many analysts who have price targets in the low $20's.