Share Repurchases And Latin American Growth To Propel Company's Earnings And Share Value

Key Takeaways

• Continuous product innovation and digital expansion are set to attract more students, boosting enrollments and revenues across key markets.
  
• Significant cash flow and a strong balance sheet enable aggressive share repurchases, potentially increasing the stock price by enhancing EPS.
  
• Dependence on Latin American markets, particularly Mexico and Peru, alongside risks like currency volatility and regional instability, could significantly impact Laureate Education's financials.

Catalysts

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

• The significant cash flow generation and strong balance sheet of Laureate Education, enabling aggressive share repurchases ($72 million in the first half of the year), could create an upward pressure on the stock price by reducing the number of shares outstanding, thereby potentially increasing earnings per share (EPS).
  
• Robust manufacturing and construction sectors, along with higher minimum wages, record-low unemployment, and increased consumer spending in Mexico, are driving growth in private higher education, which should positively impact Laureate Education's revenue growth in this key market.
  
• Nearshoring trends bolstering growth in Mexico, where Laureate Education has a significant presence, could further drive enrollment increases, boosting revenues through increased demand for higher education.
  
• The recovery of Peru’s economy, with GDP growth turning positive compared to a contraction last year, is anticipated to benefit Laureate Education's enrollments and revenue in the country by restoring normalized growth rates.
  
• Continuous product innovation and expansion of digital offerings to meet the evolving needs of working adults and expansion in new and adjacent cities are expected to drive growth in enrollments and revenues across Laureate Education's markets by attracting a larger student base.

Assumptions

• Analysts are assuming Laureate Education's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 14.8% in 3 years time.
• Analysts expect earnings to reach $287.4 million (and earnings per share of $1.73) by about September 2027, up from $200.8 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 10.5x on those 2027 earnings, down from 11.1x today. This future PE is lower than the current PE for the US Consumer Services industry at 20.9x.
• Analysts expect the number of shares outstanding to decline by 2.97% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

Risks

• The ongoing volatility in the Mexican peso could adversely impact Laureate Education's financials through foreign exchange losses, influencing revenue and net income negatively.
  
• Delays in the academic calendar, as noted with the shift of $13 million of revenue and $11 million in adjusted EBITDA, may result in uneven financial performance across quarters, affecting predictability and stability of earnings.
  
• Dependence on the Mexican and Peruvian markets for growth exposes Laureate Education to region-specific risks such as economic downturns, political instability, or changes in regulatory landscape, which could impact both enrollment numbers and revenue.
  
• The provision of enhanced discounts and scholarships, particularly in Peru due to economic downturn, could diminish net revenue and affect the net margins negatively if continued longer term.
  
• The anticipation of significant margin expansion in the second half of the year might not materialize if expected improvements in operating efficiency initiatives or macroeconomic conditions do not occur as planned, impacting earnings and cash flow projections.

Valuation

• The analysts have a consensus price target of $18.0 for Laureate 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 $20.0, and the most bearish reporting a price target of just $17.0.
  
• 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 $287.4 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $14.61, the analyst's price target of $18.0 is 18.8% 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.