Currency Volatility And Competition Will Erode Margins In Mexico’s Education Sector

Key Takeaways

• Strong growth in Peru and Mexico, driven by economic improvements and new policies, is set to enhance revenue through increased enrollments.
  
• Strategic focus on online programs and cost management in Mexico aims to boost margins and diversify revenue streams, supporting EBITDA growth.
  
• Currency fluctuations, economic slowdowns, and increased competition in Mexico pose risks to revenue, enrollment growth, and profitability margins for Laureate Education.

Catalysts

Offers higher education programs and services to students through a network of universities and higher education institutions.

• Strong enrollment growth in Peru, driven by improved macroeconomic conditions and increased consumer spending, is anticipated to enhance revenue streams, with a 16% year-over-year increase expected for the intake cycle.
  
• The new administration in Mexico has introduced policies focused on fiscal discipline, industrial modernization, and infrastructure, which can stimulate economic growth and potentially drive increased enrollments, positively affecting revenue.
  
• Implementation of cost deferrals and focus on productivity gains in Mexico are expected to contribute to margin expansion, enhancing adjusted EBITDA and net margins in the coming quarters.
  
• The strategy to scale fully online programs, particularly targeting working adults in Mexico, is expected to diversify and increase revenue streams while offering potential for higher margins compared to traditional face-to-face offerings.
  
• The continuation of the stock repurchase program, with a new $100 million authorization, is anticipated to create shareholder value and positively impact earnings per share (EPS) via reduced share count.

Laureate Education Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Laureate Education's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.1% today to 15.6% in 3 years time.
• Analysts expect earnings to reach $294.7 million (and earnings per share of $1.54) by about December 2027, up from $250.3 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 15.7x on those 2027 earnings, up from 11.6x today. This future PE is lower than the current PE for the US Consumer Services industry at 19.4x.
• Analysts expect the number of shares outstanding to grow by 8.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.59%, as per the Simply Wall St company report.

Laureate Education Future Earnings Per Share Growth

Risks

• The impact of currency fluctuations, especially the weakening of the Mexican peso, could adversely affect as-reported revenue and adjusted EBITDA, presenting a risk to earnings in dollar terms.
  
• The pullback in economic activity in Mexico following the presidential election, including decreased government stimulus and softer business sentiment, may dampen future enrollment and revenue growth rates.
  
• The proposed expansion of public university capacity in Mexico could increase competition, potentially limiting growth in new enrollments and affecting revenue margins.
  
• Timing shifts of expenses and revenue can create unpredictability in quarterly financial performance, complicating margin and earnings projections.
  
• Enhanced discounts and scholarships implemented during challenging economic periods, as seen in Peru, could compress margins if required again, impacting net profitability.

Valuation

• The analysts have a consensus price target of $20.0 for Laureate 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 2027, revenues will be $1.9 billion, earnings will come to $294.7 million, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 6.6%.
• Given the current share price of $19.28, the analyst's price target of $20.0 is 3.6% 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.