Investing In New Programs And Partnerships Will Address Future Workforce Needs

Key Takeaways

• Introducing new programs and employer partnerships aims to boost enrollment and service revenue, leveraging labor market opportunities.
  
• Share repurchases suggest potential EPS growth by reducing outstanding shares, signaling confidence to investors.
  
• Declining enrollments, inflationary pressures, and regulatory risks could negatively impact Grand Canyon Education's revenues, net margins, and profitability.

Catalysts

Provides education services to colleges and universities in the United States.

• GCU has introduced 148 new programs, emphases, and certificates directly tied to labor market opportunities, expecting to boost enrollment and subsequently increase revenue.
  
• The partnership strategy with employers to address workforce shortages in key sectors like education, healthcare, and technology is projected to drive enrollment growth and enhance service revenue.
  
• Investments in advanced standing programs and online prerequisite coursework contribute to enrollment gains, especially in ABSN courses, leading to higher revenue per student and overall revenue growth.
  
• Efforts to resolve FAFSA issues and strategies to increase traditional student enrollment are expected to enhance enrollment numbers on campus and improve net margins due to operational efficiencies.
  
• Share repurchases are significant, signaling to investors potential increases in EPS as the number of outstanding shares decreases.

Grand Canyon Education Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grand Canyon Education's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.1% today to 22.4% in 3 years time.
• Analysts expect earnings to reach $270.7 million (and earnings per share of $9.97) by about January 2028, up from $225.1 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 21.9x on those 2028 earnings, up from 21.8x today. This future PE is greater than the current PE for the US Consumer Services industry at 20.7x.
• Analysts expect the number of shares outstanding to decline by 1.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.34%, as per the Simply Wall St company report.

Grand Canyon Education Future Earnings Per Share Growth

Risks

• The decline in traditional student enrollment due to FAFSA processing issues and the significant drop in high school senior FAFSA completions could impact future revenues derived from the ground campus.
  
• Inflationary pressures have led to decreased ancillary revenues, with students spending less on campus amenities, which could negatively impact overall net margins.
  
• Service revenue was slightly lower than expected due to lower-than-expected revenue per student and enrollments, posing a potential risk to earnings expectations.
  
• Planned contract modifications and site closures are anticipated to reduce hybrid revenues by $8.9 million compared to 2024, affecting overall revenue growth projections.
  
• Potential regulatory changes or restrictions could negatively impact enrollment in certain programs, particularly if new administration policies lead to increased operational costs, affecting net margins and profitability.

Valuation

• The analysts have a consensus price target of $182.33 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 $270.7 million, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 6.3%.
• Given the current share price of $170.81, the analyst's price target of $182.33 is 6.3% 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.