Description

The quick and dirty: Grand Canyon (NYSE: LOPE) is attractive because it is recovering from covid related enrollment losses after 2021 that caused its EBITDA to decline from $296MM in 2019 to $265.5MM during the TTM. Despite the decline in EBITDA, EPS grew from $5.42 to $6.00 per share because LOPE repurchased 33% of its shares over that same period. We believe that LOPE will ultimately return to and surpass its prior profitability which should result in about $7.75 in EPS for 2024 which would result in $138 stock price based on its historical average froward P/E of 17.8x. What makes LOPE particularly attractive in this environment is that it is already on the path to recovery but that that path will be accelerated if unemployment rises and the economy slows.  The defensive nature of the stock and its counter-cyclical nature could lead to a higher than average multiple for the company as the economy deteriorates.

Lope provides education services including learning management system, internal administration, infrastructure, and support services; academic services comprises program and curriculum, faculty and related training and development, class scheduling, and skills and simulation lab sites; and counseling services and support include admission, financial aid, and field experience and other counseling services. It also offers marketing and communication services, such as lead acquisition, digital communications strategy, brand identity, market research, media planning and strategy, video, and business intelligence and data science; and back-office services comprising finance and accounting, human resources, audit, and procurement services.

LOPE provides its services to the non-profit Grand Canyon University (“GCU”) for 22,568 ground students for the GCU campus and 86,065 for GCU online. For LOPE providing services to GCU, LOPE receives 60% of all GCU revenues.

Through its Orbis subsidiary, the company supports healthcare education programs for 27 universities at 36 different locations for 4,315 Accelerated Bachelor of Science in Nursing ("ABSN") students. These students have significantly higher average annual tuition than those at GCU.

Since 2021, Grand Canyon’s business has been disrupted by Covid resulting in declines in enrolment in GCU online and in the Orbis ABSN program.  The declines in these programs has caused EBIT to decline from pre-covid levels of approximately $270 to the current TTM run rate of $234.5. Below I will outline the complications associated with the ABSN program and GCU online and how they are currently turning around.

Until recently, GCU online had been declining from its peak of over 91,000 students in May of 2021. Online enrolments started to grow again in the 3^rd quarter of 2022 and have continued to grow for the last three quarters to the current level of 86,065 students. Online enrolment declined in 2022 because the job market tightened up significantly providing little incentive for professionals to enhance their resume and employment opportunity by perusing a post-graduate degree. Secondly, GCU has high touch partnerships with certain partner schools, hospitals and other organizations that works with to recruit online students. During covid, LOPE could not engage in any of the face to face on the ground recruiting that is responsible for about 1/3 of its online enrolment. This also contributed to a decline in GCU’s online growth. Now that Covid has passed and that the job market is starting to soften online enrolment has started to grow again.

With respect to the ABSN program, the tight labor market has significantly reduced the nature of applicants who have been trying to sign up and the nursing shortage during Covid limited the ability of LOPE to provide clinicals and staff for training which forced LOPE to cut back on the number of candidates they could train. As a result, the number of ABSN students declined from about 5000 to 4,315. In 2019, the LOPE’s ABSN program generated about $6MM in EBIT.  Since early 2022, the ABSN program has been contributing about a $15MM drag.  

Historically, 50% of the applicants for the ABSN program had bachelor degrees and 50% of them did not. LOPE would typically take the applicants that had bachelor degrees and encourage those that did not to go to their community college to get the required science credits. Since Covid and the resulting tight job market, the desirability of a nursing degree has diminished as wages have risen and jobs are abundant. Now about 85% of the applicants that LOPE is receiving for their ABSN program lack the required college credits to start the program. To combat this issue LOPE has started its own low-cost feeder program to enable applicants to get the required credits necessary to get into LOPE’s ABSN program. Thus far LOPE has enrolled 1200 students in the program and they expect students will be able to complete it in anywhere between three and eighteen months. Ultimately, they would like to grow the feeder program to 5000 students. By the end of 2023, we expect that the ABSN program will return to break even and then it will return to its historic profitability in 2024.  One that occurs, LOPE should return to growing the ABSN program by about 15-25% a year.

Ultimately, LOPE believes they can grow the ABSN program to approximately 24,000 students across 80 locations over the next 5-10 years. The fee that LOPE collects per student is about $45,000 per year. Once the program reaches maturity, LOPE believes that it should generate 20% operating margins. That works out to about $1.08BB per year in revenue and $216MM in operating profit.  

At the end of the day, LOPE should be able to grow profitability by the mid to high single digits per year with the ground student enrollment in the high single digits, online enrolment in the mid -single digits  and the ABSN program growing in the high teens to mid-twenties. All of this growth is counter cyclical as demand picks up during times of low employment and costs for talent decline in a softer job market.

Catalyst

* Increasing unemployment driving demand 

* ABSN feeder program accelerating growth in ABSN