Consolidation And Nursing Demand Will Drive Future Opportunities

Key Takeaways

• Consolidating educational institutions is set to enhance operational efficiency and growth, boosting net income and earnings.
  
• Strategic marketing and addressing nursing demand are key to driving enrollment growth, impacting top-line and profitability.
  
• Increased costs in employee compensation and advertising, along with dependencies on external systems, threaten to compress net margins and hinder profitability.

Catalysts

Provides online and campus-based postsecondary education and career learning in the United States.

• The plan to consolidate APEI's three educational institutions into a single entity is expected to create both revenue and cost synergies over time. This simplified structure might enhance operational efficiencies and growth opportunities, thereby positively impacting net income and earnings.
  
• The focus on improving marketing strategies and boosting conversions, especially through organic lead generation and hyperlocal marketing for campuses, is likely to drive enrollment growth, which should increase revenues.
  
• The increasing demand for nursing professionals due to an annual shortage presents a significant opportunity for APEI's nursing schools like Rasmussen and Hondros to grow enrollments and revenues, impacting both top-line growth and margins.
  
• Improved profitability metrics at Rasmussen University, already showing positive adjusted EBITDA progress, suggest a potential for increased future earnings contribution, especially as enrollment trends advance.
  
• Redeeming preferred shares is expected to be accretive to net income and earnings per share by reducing dividend outflows, which could enhance shareholder value and improve net margins.

American Public Education Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Public Education's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.6% today to 7.8% in 3 years time.
• Analysts expect earnings to reach $54.9 million (and earnings per share of $2.07) by about March 2028, up from $10.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, down from 39.5x today. This future PE is lower than the current PE for the US Consumer Services industry at 18.5x.
• Analysts expect the number of shares outstanding to grow by 2.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

American Public Education Future Earnings Per Share Growth

Risks

• The company is facing increased employee compensation costs and bad debt expenses, which can negatively impact net margins and overall profitability.
  
• APUS (American Public University System) experienced a slight decrease in EBITDA margins in the fourth quarter due to investments in curriculum and IT infrastructure, which could affect net margins if these investments do not lead to expected revenue increases.
  
• The company's first-quarter guidance reflects lower anticipated revenue growth and adjusted EBITDA due to the extended downtime of the Army and Air Force TA portals, highlighting potential volatility and dependency on external systems, impacting short-term revenue.
  
• Consolidation of the three degree-granting institutions into one system, while intended for synergy and growth, carries execution risks and initial costs that might strain short-term financials before yielding expected revenue and cost synergies.
  
• Advertising and labor costs have risen to support growth, and while they contribute to enrollment increases, there is a risk that these higher costs might not translate effectively into proportional revenue increases, potentially squeezing net margins.

Valuation

• The analysts have a consensus price target of $24.0 for American Public Education based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $703.0 million, earnings will come to $54.9 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 7.6%.
• Given the current share price of $22.07, the analyst price target of $24.0 is 8.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.