Sector financial performance:

This company that primarily provides postsecondary, degree-granting education programs and certificates through online and on-campus has been grouped into private university –online sector in education industry.

It seems that demand for online or on-campus degree granting programs from non-traditional students – working students mainly has been weak in the past several years  as indicated by decreasing enrollment for the companies in this sector(about 2-5% organic decrease annually ). Shrinking demand resulted in increase in intense in competition for students, which put huge pressure on admission. Companies have to spend more on promotion and marketing such as scholarship.

As enrollment/revenue decreases, companies’ profitability has been hurt. As a reaction to shrinking cash flow, companies have to keep raising tuition while decreasing enrollment, cutting expenses, and closing underperformance programs.  It seems those measurement have been working to help improve companies’ profitability since 2017. However, for those that have to raise tuition, they may have to experience continuingly decrease in enrollment and thus revenue and have had to retire more unprofitable programs.

As a result of impacts described above, almost all of companies’ gross margins (include depreciation and amortization, rent, and exclude marketing expenses) went down between 2015 and 2017. Our data indicate those companies’ gross margins were between 42-68% (average 56%) with admission and marketing experience as percentage of sales of 27% (average) and G&A as percentage of sale of 12% (average) in 2017. The average operating margin among those companies is 7%. Since 2017, the average gross margin was improved to about 62% probably due to rising tuition and teach-out of schools. And. With help costs saving in SG&A, the operating margin up to about 8.5% in 2018.

According to our analysis, the current companies’ enterprise price/EBI ratio is between 24 and 33and enterprise price/sales is between 0.4-5.2.

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Company performance:

It seems that the demand for this company’s online degree programs and on-campus programs has been strong in the past several years, driven primarily by relatively lower tuition such as scholarship incentives and flat tuition increase, as indicated by continuingly quickly increase in total enrollment in both online and on-campus operation. Online increased faster as a result of brand recognition.

The first six months of fiscal 2018 compared with the same period of 2017

Revenue increased by about 10% attributable primarily to increase in enrollment in both online (increased by 10% as date) and on-campus (increased by 4% as date) and in room and board spending partially offset by the scholarships.

The fiscal 2017 compared with the 2016

Revenue increased by about 12% attributable primarily to increase in enrollment in both online (increased by 11% as date) and on-campus (increased by 9% as date) and in room and board spending partially offset by the scholarships. Tuition keeps flat.

The first nine months of fiscal 2017 compared with the same period of the 2016

Revenue increased by about 12% attributable primarily to increase in enrollment in both online (increased by 11% as date) and on-campus (increased by 9.5% as date) partially offset by the scholarships. Tuition keeps flat.

Fiscal 2016 compared with 2015

Revenue increased by about 12% attributable primarily to increase in enrollment in both online (increased by 9% as date) and on-campus (increased by 14% as date) partially offset by the scholarships. Tuition for online program increased about 1%.

Fiscal 2015 compared with 2014

Revenue increased by about 12% attributable primarily to increase in enrollment in both online (increased by 8% as date) and on-campus (increased by 19% as date) partially offset by the scholarships. Tuition keeps flat.

Its gross margin (include depreciation and rentals but exclude admission expenses and marketing) went down by about 100 basis points to around 57% in 2017 primarily due to revenue’s shifting to lower gross margin service such as occupancy and food service for on campus students.  During the same time, the SG&A as percentage of sales went down by about 300 basis points to 29% in 2017 due to the leverage of expenses of admission, marketing, and G&A as a result of revenue’s fast increase. Its operating margin actually got improved and thus went up to about 28% in 2017 from about 26%.

Gross margin (58% in 2018) continued to grow in 2018 as enrollment increase continued. It operating reached 29% in 2018. Benefited from both improvement in revenue and margin, cash flow of this company has been increased.

Stock price

This stock currently has an enterprise price/EBI of 28($111). We think that its stock is being relatively slightly undervalued considering its stronger increase in revenue and enrollment than its peers.