Grand Canyon Education, Inc.

LOPE Details

Grand Canyon Education, Inc. (NASDAQ: LOPE) is a for-profit education services company that currently serves 26 university partners in the US. It has developed technological solutions, infrastructure, and operational processes to support post-secondary education sector on a higher scale. LOPE’s most crucial university partner is Grand Canyon University (GCU), a non-profit, regionally accredited university that offers graduate and undergraduate degree programs through nine on-campus colleges and two off-campus colleges in offline and online modes. As of June 18, 2021, the company’s market capitalization stood at USD 4.04 billion.

Q1FY21 Results: LOPE reported service revenue of USD 236.93 million for Q1FY21 (ending March 31, 2021) as compared to USD 221.66 million in Q1FY20, thus realizing a slight growth of 6.9% YoY. The improvement in service revenue can be accredited to increase in university partner enrollments, which recorded an uptick of 7.2% YoY. The operating profit was USD 84.23 million, up by 4.24% in Q1FY21 compared to Q1FY20. Operating margin for the period declined by 90 bps to 35.55% in Q1FY21. The company reported a net income of USD 78.11 million in Q1FY21 vs USD 71.39 million in Q1FY20.   

Key Risks: The company derived a majority of its revenue in FY20 from contractual obligation with GCU. Hence, a reduction in the enrollment in GCU program, and uncertainty related to the termination of contracts can hurt the financial and operating performance of the company. In addition, LOPE carries certain restrictions in its credit agreement which mandates for it to maintain certain specific ratios and fulfil compliance requirements. Any default on the part of the company would make the debt due and payable immediately.     

Outlook:  In Q2FY21, LOPE expects to clock revenue of USD 202.0 million, with an adjusted operating margin of 25.6%. EPS for Q2FY21 is expected to be USD 1.09. This guidance rides on the disruption caused by COVID 19 pandemic in the form of reduction in the number of residential students, refund in fees for dormitory and meal payments, and closure or seizure in activities of supplementary business units. For FY21, the company estimates its service revenue to be USD 919.9 million, with an adjusted operating margin of 33.8% and EPS of USD 6.19.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

 (Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

LOPE Daily Technical Chart

Stock Recommendation: LOPE has decreased by 21.42% and 7.62% in the past 3 months and 6 months, respectively, and is currently inching towards the higher end of the 52-week range of USD 75.64 to USD 115.96. The stock is currently trading below its 200 DMA level. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 101.51. Considering the correction in stock price, technological advancement and decent fundamental growth, we recommend a “Buy” rating on the stock at the closing price of USD 87.08, down by 1.54% as of June 18, 2021.

* All forecasted figures and Industry Information have been taken from REFINITIV.

* The reference data in this report has been partly sourced from REFINITIV.