Advanced Online Programs And Workforce Initiatives Will Open Future Opportunities

Key Takeaways

• Strong enrollment growth driven by innovative programs and strategic employer collaborations boosts future revenue and net margins.
  
• Strategic tuition decisions, new programs, and site expansions support stable enrollment, revenue, and potentially higher earnings.
  
• Declining enrollment and funding uncertainties, along with increased costs, threaten revenue growth, while changes in contracts further pressure margins.

Catalysts

Operates as an education services company in the United States.

• Grand Canyon Education is experiencing strong online enrollment growth due to innovative programs directly aligned with labor market opportunities, which is expected to positively impact future revenue growth.
  
• GCU's collaboration with employers to address workforce shortages, particularly in sectors like healthcare, engineering, and technology, has significantly increased new starts. This is likely to boost net margins through increased enrollment and potential for higher program fees.
  
• The strategic decision to not significantly increase tuition amidst industry-wide tuition hikes may enhance enrollment and retention, thereby supporting steady revenue streams and net margins.
  
• Expansion of hybrid campus locations and the introduction of new programs with university partners suggest potential for substantial enrollment and revenue growth, ultimately driving earnings upward.
  
• Continued investment in workforce development programs and new site openings are anticipated to support enrollment growth and optimize operational efficiencies, potentially enhancing operating margins and cash flow over time.

Grand Canyon Education Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grand Canyon Education's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.9% today to 22.3% in 3 years time.
• Analysts expect earnings to reach $273.8 million (and earnings per share of $10.14) by about May 2028, up from $226.2 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 22.0x on those 2028 earnings, down from 23.3x today. This future PE is greater than the current PE for the US Consumer Services industry at 19.0x.
• Analysts expect the number of shares outstanding to decline by 3.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

Grand Canyon Education Future Earnings Per Share Growth

Risks

• Potential funding cuts or changes in Washington could create uncertainty in future federal aid, which might impact student enrollment, particularly at the ground campus, potentially affecting revenue.
  
• The decreased revenue per student year-over-year due to changes in contract modifications and leap year effects highlights sensitivity to student financial dynamics, impacting both revenue and net margins.
  
• Operating margins were negatively impacted by increased benefit costs and additional spending, suggesting potential pressure on future earnings if such costs continue to rise.
  
• Declining high school graduation rates and reduced college attendance could pose a long-term risk to traditional campus enrollment growth, affecting revenue from this segment.
  
• New university partner contracts removing reimbursement for faculty costs result in reduced revenue per student, potentially impacting overall revenue growth from the hybrid pillar.

Valuation

• The analysts have a consensus price target of $199.333 for Grand Canyon 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 $1.2 billion, earnings will come to $273.8 million, and it would be trading on a PE ratio of 22.0x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $185.45, the analyst price target of $199.33 is 7.0% 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.