Expanding Hybrid Education And Online Programs Fuels Revenue And Innovates Learning Paths

Key Takeaways

• Emphasis on online and hybrid models, with expansions in healthcare programs, is designed to attract more students and diversify enrollment.
  
• Investments in off-campus sites and employer partnerships are aimed at tackling workforce shortages, enhancing graduation outcomes, and boosting enrollment.
  
• Heavy reliance on specific growth areas and contract changes with partners may strain financial health, impacting enrollments, revenue, and margins.

Catalysts

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

• Online and hybrid enrollment growth, with a particular emphasis on the hybrid model and the expansion of online academic programs. This is expected to positively impact future revenues by attracting a wider base of students. Impact on Revenue
  
• Investment in new delivery models and academic programs tailored to current market needs, such as healthcare, specifically nursing and occupational therapy, expected to drive student enrollment and program diversification. Impact on Revenue and Net Margins
  
• Expansion of off-campus classroom and laboratory sites, with a significant investment earmarked for these developments, aiming to accommodate about 50,000 students and cater to the demand in professions with shortages. Impact on Revenue Growth
  
• Partnerships with employers to directly address workforce shortages, creating a direct pipeline for students into high-demand careers, thereby improving graduation outcomes and employability, which can increase institutional attractiveness and enrollment. Impact on Revenue through Enhanced Enrollment
  
• Strong financial performance with year-over-year increases in service revenue, operating income, and net income, suggesting operational efficiency and effective cost management that are likely to contribute to future earnings growth. Impact on Net Margins and Earnings

Assumptions

• Analysts are assuming Grand Canyon Education's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.9% today to 22.4% in 3 years time.
• Analysts expect earnings to reach $270.0 million (and earnings per share of $9.83) by about September 2027, up from $219.3 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 19.1x on those 2027 earnings, up from 18.2x 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 decline by 2.59% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.09%, as per the Simply Wall St company report.

Risks

• FAFSA processing issues and glitches causing major delays in university enrollment processes could lead to decreased enrollments, negatively impacting revenue from tuition and related services.
  
• Heavy investments in facilities, technology, and personnel to support creative delivery models and relevant programs, if not managed carefully, could strain operating margins and cash flow, impacting net income.
  
• The challenge of maintaining high growth rates in online and hybrid enrollment platforms in a competitive education market could pressure revenue growth and the ability to sustain high levels of profitability over time.
  
• Dependence on significant growth in specific high-demand areas like nursing, teaching, and technology, which if unmet due to unforeseen circumstances, could impact revenue projections and earnings growth.
  
• Changes to contract terms with university partners, reducing revenue share percentages in exchange for not reimbursing certain costs, could lower service revenue per student, impacting overall revenue and margins.

Valuation

• The analysts have a consensus price target of $165.67 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 2027, revenues will be $1.2 billion, earnings will come to $270.0 million, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 6.1%.
• Given the current share price of $137.41, the analyst's price target of $165.67 is 17.1% 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.