Strategic Growth And Optimized Operations Set To Bolster APEI's Financial Horizon

Key Takeaways

• Expansion and strategic marketing adjustments in educational units signal potential for increased enrollments, revenue growth, and improved EBITDA margins.
  
• Initiatives like IT infrastructure optimization and curriculum strengthening aim to boost operational efficiencies and financial performance without detrimentally affecting enrollments.
  
• Declining enrollments and regulatory challenges across campuses, coupled with negative EBITDA in some segments, highlight risks to revenue and profitability.

Catalysts

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

• The expected positive turn in Rasmussen University's enrollment and revenue growth signals increased future revenues and improved net margins, particularly as they move into EBITDA positive territory in Q4 2024.
  
• APEI's price increases across various segments could enhance future revenues without impacting student enrollments negatively, contributing to better financial performance.
  
• Expansion plans for Rasmussen University's campus footprint, post lifting of the Department of Education growth restrictions, could significantly increase enrollment numbers, boosting future revenues and market share in the nursing education segment.
  
• The strategic marketing adjustments at APUS to correct a decline in registrations could stabilize and potentially increase future enrollments, positively impacting revenue growth.
  
• Investment in IT infrastructure optimization, online curriculum strengthening, and marketing spends are expected to improve operational efficiencies, potentially leading to higher EBITDA margins across APEI’s educational units.

Assumptions

• Analysts are assuming American Public Education's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 6.5% in 3 years time.
• Analysts expect earnings to reach $43.8 million (and earnings per share of $1.43) by about October 2027, up from $4.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.6x on those 2027 earnings, down from 59.7x today. This future PE is lower than the current PE for the US Consumer Services industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 20.08% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Risks

• The decline in total student enrollment at Rasmussen, driven by a decrease in on-ground enrollment, impacts revenue negatively.
  
• Adjusted EBITDA for the Rasmussen segment was negative, indicating challenges in achieving profitability that could affect overall earnings.
  
• Enrollment trends at APUS are flat to slightly down due to changes in marketing spend, which might result in lower revenue and impact net margins.
  
• The implementation of tuition and fee increases carries the risk if these changes lead to a degradation in student enrollments, thereby potentially reducing revenue.
  
• The reliance on legislative or regulatory relief for operational challenges in specific campuses (e.g., Illinois campus for nursing) introduces uncertainties that could affect the ability to meet enrollment and revenue targets.

Valuation

• The analysts have a consensus price target of $18.33 for American Public Education based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $22.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $669.9 million, earnings will come to $43.8 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of $14.99, the analyst's price target of $18.33 is 18.2% higher.
• 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.