Following its Q1 2013 earnings release and conference call on May 7, 2013 [see transcript], Grand Canyon Education, Inc. (LOPE) shares rose almost 15%. Any short interest squeeze impact aside, the subsequent run-up in share price amid better than expected results, enthusiastic comments from management, and positive notes from the sell-side analysts, were essentially a complete reversal from current views on the private sector education industry in general.
Grand Canyon decisively beat analyst consensus estimates on revenues and earnings per share, with enrollment up over 15% from the same period one year ago, and also reported an unheard of low bad debt of 3.5%. The company also announced its board of directors has increased the authorization under its existing stock repurchase program by another $25.0 million. But numbers crunching aside, I wanted to focus on a possible 'why' behind Grand Canyon's ability to currently stand out among most of the for-profit players.
It appears to be a simple commitment from Grand Canyon's management to deliver high quality education at a reasonable tuition cost, something the industry has struggled with for years leading up to their notorious dusting by the Obama administration. In my observations as a twenty-two year veteran of post-secondary for-profit education, the unintended outcome of many operators has resulted from steady annual tuition hikes (higher costs to students) decoupled by reduced instructional spending (lower costs to owners) ultimately leading to the current road to near ruin. Excessive government intervention and regulatory pressure is often cited as the blame, yet Grand Canyon Education seems to be bucking the trend.
On the earnings conference call, CEO Brian Mueller confidently discussed his organization's minimum 3.0 GPA admission requirements for new students; aggressive improvement of student retention by focusing enrollment on historically successful programs; increases in full-time, on-line faculty; and concurrently freezing tuition and room & board at what I agree are highly competitive rates. Assuming strong regulatory and accreditation compliance, this counter-intuitive investment in educational services and facilities without student tuition and fee hikes can only lead to positive outcomes for any education operator in today's climate. This apparently may be the case for Grand Canyon Education.
Detractors will point out Grand Canyon's relatively rich valuations, particularly in tangible book and cash flow; and draw attention to the company's controllable hybrid ground and on-line business model essentially in one large campus location in Arizona; not to mention a sectarian Christian representation that is unique to the private sector education space.
What I take away from this rare success in today's education market is that several of their key executives are former managers at competitor Apollo Group, Inc. (APOL). I have no inside scoop on this ship jump, but I wonder if they envisioned what was clear to me as a former operator: a commitment to building a legacy reputation via a counter-intuitive, low tuition cost - high quality education model, that is historically resisted by the sector; and then in this situation, setting-off to Grand Canyon University on the other side of town to manifest this ostensibly successful vision.