Saturday, March 28, 2020

Perdoceo

If you've been a value investor for some time, you might recognize online education provider Perdoceo (PRDO) as it is formerly known as Career Education Corp (CECO). CECO appears to have been a bad actor in the for-profit education sector that was forced to clean up its act after a series of scandals rocked the industry several years ago.

The structure of the industry (uneducated and often poor customers/students, government financing of tuition) made it possible for snake-oil salesmen and swindlers to make a lot of money while returning little of value to society, and the industry paid for its sins in the form of bankruptcies, fines and...brace yourself...lower multiples! This latter is what attracted me to the industry, and I struck gold by recognizing and buying one of the few ethical players around, Strayer Education. Sadly, I sold it too soon, as the market eventually recognized it as a stand-out and restored its lofty multiple.

Now, I might be getting another chance.PRDO appears to have cleaned itself up, but still trades at a very low multiple. They now comply with a lot of the requirements they used to flout, and appear to be taking the whole "education" thing seriously.

This month's sell-off has made the company's valuation downright mouth-watering. This is despite the fact that almost all of the company's education is done online, so they stand to be a beneficiary of any physical distancing trends that may take place.

The company trades for $730 million, with net cash of nearly $250 million, for an enterprise value of $480 million. Last year, the company generated operating income of $86 million. Already, this makes for a decent multiple, but it gets even better when you account for the fact that it includes $37 million of fines from the previous era.

I think the main risk to this business is the government funding model. If the government decides to upend post-secondary education (e.g. free college for anyone), there is a risk they would no longer wish to finance tuition for for-profit schools the way they are now. With that in mind, I would take a pass on this company if Sanders were to become the nominee for the Democrats. Now that this possibility is remote, I think the funding model is fairly secured for the next several years, as neither Trump nor Biden seem interested in upending the current system.

Before the virus affected things, Perdoceo was set to grow income again this year, suggesting they have figured out how to market successfully under the more stringent rules. I don't pretend to know how this recession we are entering into will affect its year, but it's important to note that there are counter-cyclical elements to this business, as job losses often lead people to try to upgrade their skills. But even if things hit the fan, this company has staying power to ride it out, and so for me Perdoceo represents an asymmetric bet.

Disclosure: Author has a long position in shares of PRDO

3 comments:

Anonymous said...

Why are they sitting on so much cash then?

Saj Karsan said...

From the latest cc:

"Lastly, we will continue to maintain a balanced capital allocation strategy, that focuses on maintaining a strong balance sheet and adequate liquidity, while prudently investing in organic growth projects, such as students learning initiatives, and evaluating diverse strategies to enhance shareholder value, including share repurchases and acquisitions of quality educational institutions and progress. Ultimately, our goal is to deploy resources in a way that drives long-term shareholder value, while supporting and enhancing the academic value of our institutions."

To that end, they just spent $45 to acquire Trident University.

Anonymous said...

Who is the best comp here? Is it STrayer? If so, why such a large multiple gap?

What would be the catalyst for the re-rating, seems to be loved by the sell-side and valuation is well known at this point

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