Company Overview: Grand Canyon Education, Inc. (NASDAQ: LOPE) is a for-profit education services company and currently offers its services to 27 university partners in the US.  It also offers various support services in the post-secondary education sector using its technological solutions, infrastructure, and operational processes. Its services assist students and staff/faculty of partner universities in marketing, enrollments, counseling, financial services, technology, tech-support, compliance, human resources, classroom operations, content development, training and recruitment, etc.

LOPE Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Slight Growth in Revenue: In Q2FY21, the company's service revenue amounted to USD 201.49 million, representing an 8.46% increase year-over-year from USD 185.77 million, resulting from an increase in both universities partner enrollments and revenue per student.
• Higher Operating Expenses: LOPE's operating expenses for the quarter were USD 151.24 million, higher than USD 137.46 million for Q2FY20. The operating income for Q2FY21 was USD 50.25 million vs. USD 48.31 million in Q2FY20.
• Improvement in Net Income: The reported net income for Q2FY21 was USD 49.46 million vs. USD 47.01 million in Q2FY20, representing diluted earnings per share (EPS) of USD 1.09.

Key Trends; Analysis by Kalkine Group 

Relationship with GCU: LOPE's primary university partner is Arizona-based Grand Canyon University (GCU), a non-profit, regionally accredited university offering graduate and undergraduate degree programs through nine on-campus colleges and two off-campus colleges in offline and online modes.

On July 01, 2018, LOPE sold GCU to an independent non-profit corporation and signed an Asset Purchase Agreement (APA) with GCU, under which it was granted a 6% secured note due 2025 for USD 0.87 million in exchange for the transfer of certain related assets to GCU.

As a result of this sale and transfer, LOPE no longer operates any higher education institution or participates in Title IV programs.

Student Enrollments:

• As of June 30, 2021, partner enrollments increased 3.54% to 101,808 vs. 98,326 as of June 30, 2020.
• Enrollments at GCU totaled 97,774 as of June 30, 2021, representing a 3.3% increase year-over-year.
• University partner enrollments at off-campus sites at Q2FY21 end were 4,210, including 176 GCU students.

Other Key Findings in Q2FY21:

• During Q2FY21, LOPE witnessed an increase in revenue per student, owing to the impact of the increased room, board, fee and other revenues at GCU (compared to Q2FY20, which witnessed lower revenue due to the outbreak COVID-19).
• In June 2021 and 2020, LOPE issued certain loan amounts to GCU under the APA to fund its capital expenditures. The borrowed amount was repaid the following month both times.
• LOPE’s Board updated the authorized amount under its existing stock repurchase program in July 2021 by USD 970.0 million to USD 1.47 billion. Under the repurchase program, the company can buy back its common stock at its discretion until December 31, 2021, unless extended/shortened.
• As of June 30, 2021, the available balance under the program amounted to USD 96.6 million (increased to USD 1,066.9 million after the new authorization in July 2021)

Balance Sheet & Liquidity Position

• Declining Cash Balance: The company exited Q2FY21 with a cash balance of USD 113.86 million, 55.62% less than USD 256.61 billion at the end of FY20.
• Cashflow from Operations: Operating cash inflow in H1FY21 was USD 210.33 million vs. USD 221.05 million in H1FY20, owing to the change in income tax amounts.
• Increasing Debt: LOPE's total outstanding debt amounted to USD 126.20 million at Q2FY21 end, lower than the total debt of USD 107.77 million as of December 31, 2020.

Key Metrics: In Q2FY21, LOPE's EBITDA and operating margins were 28.7% and 24.9%, higher than the industry median of 21.6% and 13.5%, respectively. ROE stood at 3.2%, at par with the Q2FY20 return. Debt/Equity was 0.08x as of June 30, 2021, vs. the industry median of 0.46x.

Leverage Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 49.43% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. hold the maximum stake in the company at 9.36% and 7.71%, respectively, as also highlighted in the chart below:

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Revenue Concentration: Most of the company's revenue in FY20 was generated from GCU. Hence, any reduction in the enrollments under the GCU program or the termination of the contractual relationship between GCU and LOPE could be detrimental to the company.
• Stiff Competition: LOPE faces intense competition from established and other emerging tech-savvy players in the industry. These competitors could adversely impact its revenues by providing better services, improved technology, lower prices, etc.
• Regulatory Risk: The higher education industry is subject to extensive regulatory scrutiny. Any compliance failure on the part of the company or its university partners could result in the imposition of financial penalties and restrictions and may also affect the brand name.
• Technology Risk: Since the company offers both online and offline education services and stores student and other data online, it is imperative that its information system is glitch-free and performs all its functions smoothly.

Outlook

• The company stated that the adverse impact of the COVID-19 pandemic, which resulted in a reduction in revenue during FY20, may also be witnessed in FY21.
• However, for Q3FY21, LOPE expects its service revenue to range from USD 207.7 million to USD 212.1 million, with the adjusted operating margin ranging between 23.2% and 24.8%. The estimated range for adjusted diluted EPS is USD 1.10 to USD 1.18.
• Similarly, for Q4FY21, its service revenue expectations are USD 254.0 million to USD 261.0 million, with adjusted operating margin ranging between 39.5% and 41.1% and adjusted diluted EPS ranging from USD 2.08 to USD 2.22.
• On a relatively long-term basis, LOPE's full-year FY21 service revenue and EPS estimates are USD 900.1 million to USD 911.5 million and USD 6.03 to USD 6.25, respectively. The estimated adjusted operating margin for the period is 31.9% to 32.7%.

Valuation Methodology: EV / EBITDA Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last six months, LOPE corrected ~18.85%. The stock is currently trading in the mid-band of its 52-week range of USD 75.64 to USD 115.96. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price with an upside of high teens (in percentage terms). We believe that the company can trade at a discount compared to its peer average considering the concentration of revenue and alteration of business structure (in 2018). We have taken peers like Laureate Education, Inc. (NASDAQ: LAUR) and 2U, Inc. (NASDAQ: TWOU). Considering the decent top and bottom-line growth, higher investment in the business, low leverage, encouraging outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 87.79, up ~0.35% as of August 25, 2021.

LOPE Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.