US Public Education May Take Longer To Recover (NASDAQ:APEI) – Seeking Alpha | Team Cansler

Markus Geber

American Public Education, Inc. (NASDAQ:APEI) provides online and on-campus post-secondary education to more than 108,400 students through three affiliates named American Public University System, Rasmussen University and Hondros College of Nursing. With a primary focus on increasing student profitability Education investments, the company has taken the initiative called Higher Education Return on Investment for Customers, better known as HEROIC.

APEI is a purpose-driven organization guided by the mission of providing significant value and cost-effective higher education to those students who have served the nation through the military. The total addressable market (“TAM”) for military training is sizeable and growing, which will help the business to grow in the future.

university programs

Higher Education Programs (Annual Report)

With its highly qualified staff, the company provides students with a variety of courses and provides graduate and undergraduate level education to students.

Last year, management proposed an approximately $325 million acquisition of Rasmussen University, funded through cash and debt financing, believing the new acquisition is strongly aligned with its mission. However, the acquisition costs appear to be considerably high, so the return on investment from this asset may lag behind the core business.

Historical achievement

sales growth

Sales growth (macrotrends.net)

Through 2019, the company’s revenue growth remained subdued and even declined significantly. However, over the past two years, revenue has grown unusually due to increased enrollment for the course and the strategic acquisition of Rasmussen University.

In the past two years, sales have grown from $268 million in 2019 to approximately $418 million in 2021.

During this period, profitability also fluctuated with sales. Despite a significantly higher turnover, the growth in profitability has remained subdued compared to 2018. However, gross margins appear to have improved significantly over the period

Also, the company has been focused on share buybacks for a very long time, repurchasing total outstanding shares from 18 million to 15 million by 2020, returning total outstanding shares to about 18 million, resulting in about 20% dilution.

In the previous period the company had been debt free. However, due to the recent acquisition, the company’s debt has increased significantly to about $147 million. The company has substantial cash holdings which mitigate the risk of increased indebtedness.

Despite a significant drop in earnings, operating cash flow remains very attractive. However, also keep in mind that the high cash flow is partly due to higher depreciation costs.

strength in the business model

The company enjoys strong brand awareness which has brought significant strength to the business model.

Unique business model

APEI focuses primarily on the military community, so there are many opportunities for the university to increase overall student enrollment. Also, over time, the company has served many students and provided them with very good opportunities, which has earned its universities a very good reputation.

With management’s significant efforts to grow the business and build its reputation, American Public Education has become the leader in the military education segment.

These factors give the company a significant advantage and advantage over its competitors.

Affordable cost

Affordable tuition has been the focus of management since its inception. In recent years, the cost of education has risen significantly and students face a significant burden of large student loans. At APEI, the company keeps the total costs around 30% below the average costs, which relieves the students significantly. Also, acting as a low-cost provider gives American Public Education a clear advantage over most universities, which offer the same courses at significantly higher prices. Low university tuition can attract talented students and further enhance university brand value.

risk factors

It should be noted that the significant increase in revenue is due to the corresponding surge in online learning, which has translated into unusual growth in student enrollment. Still, such growth might not continue in the future. Although enrollments at three of its main universities were strong this quarter, significant growth in the future seems very uncertain.

The recent acquisition of Rasmussen University could result in significantly higher operating costs, impacting the company’s overall profitability. As we’ve seen over the past few quarters, the total cost of operations and marketing has increased significantly. If the business is to continue growing in the future, the company will have to spend a lot of money on marketing, which could further hurt profitability.

Recent Developments

quarterly results

Quarterly Results (Quarterly Reports)

Over the past nine months, the company’s revenue has increased significantly, from $264 million last year in the same period to approximately $453 million year-to-date. Along with revenue growth, operating expenses have increased significantly due to the higher cost of the acquired university along with the high cost of promotions to market it. As a result, overall profitability was significantly impacted.

stock price

Stock price (macrotrends.net)

Over the years, American Public Education’s stock has typically traded at about 24 times earnings, but the stock price has fallen more than 68% from its peak to hit a multi-year low.

The company’s current market cap is around $245 million, while historically the company has generated nearly $40 million in cash flow and around $25 million in earnings. This shows that the stock is currently trading at just 10 times its historical earnings.

Also, despite the stock price decline, I don’t see a margin of safety in American Public Education’s business. Cash-consuming university acquisitions could put significant pressure on operating margins, resulting in a significant drop in profitability. I am giving a hold rating on shares in American Public Education.

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