This is a continuation of my quest to go through all 100 stocks from the 2013 Forbes Best Small Companies list. Upon first glance, if a stock is interesting but overpriced, I provide a quick rundown. Otherwise, if I come across something I like and the price is right, a full analysis and valuation report is provided.
My quick filtering method is simple and the same with every stock I look at.
- Just enter the ticker into the OSV stock analyzer
- Take a quick look at the valuation ratios
- Perform basic financial statement analysis
- Perform a quick reverse DCF or some form of valuation
Just by doing this, I can decide whether to continue investigating the company or move on to the next.
The Forbes Criteria
For new readers, the methodology used by Forbes in coming up with the list is quite simple.
- strong sales and earnings growth
- publicly traded for at least a year
- generates annual revenue between $5 million and $1 billion
- stock price no lower than $5 a share
- excluded financial institutions, REITs, utilities and limited partnerships
Introducing American Public Education Inc (NASDAQ:APEI)
Don't Get Scared Away Just Yet
For profit colleges have and always will be known as a "dirty" industry. As long as the school retains its accreditation, it has access to federal student aid which is where the money is at for these schools. It's all about meeting standards on student debt and then adequately preparing graduates for jobs. So it's no wonder that the general public and many investors don't like the industry.
American Public Education is an online only, for-profit college, targeted towards people in the military and public service community. About 57% of the enrolled students are actively serving in the military and the payment for these students come from a military sponsored program. This is the big difference between American Public Education and other for profit companies that rely on federal student loans as the main source of revenue.
The fact is that a company like Corinthian College (NASDAQ:COCO) has to tap dance around standards and other federal aid assistance rules in order to get the funding. It's come to a point where the government is again stepping in and saying that colleges have to prove that they offer "gainful employment programs" to be eligible for the federal aid program. American Public Education is much better off in this regard because a majority of its revenue is coming via the Department of Defense.
So while APEI may also get labeled as a big bad for-profit company, it can provide an opportunity to pick up shares as it usually gets tossed out along with the rest of the industry.
Always Consider the Risk
It's easy to provide the feel good story only. Who doesn't like to get excited about a stock? To limit the downside, a look at the risks should be made first.
The big risk is how the government classifies money from the Department of Defense going forward. Although the money does come from the federal government, it is currently exempt from the 90/10 rule which states that no more than 90% of the revenue can come via federal aid. Other for profit educational companies are beginning to take advantage of this loophole, so it will be a matter of time before the rule is changed.
There is a growing number of online only courses being offered by competitors. It's been around for a while now, but with advances in online technology, this could become a growing threat.
And the most obvious risk is the constant regulation and rules placed on the industry. The president wants to get involved, rules are added or modified on a yearly basis.
A lot of the fast growth has died down. From 2008 to 2012, the revenue CAGR is 24%. If you extend that to the TTM revenue figure, it drops to 20%. Despite all the paragraphs the company writes in their report about the possibility of having to increase expenses to attract more students, American Public Education has been doing a really good job of reducing Cost of Goods Sold as a percentage of revenue. It's what is helping to expand margins despite slower growth concerns.
Diluted shares outstanding has gone from a peak of 18.9m to 17.9m today. It's not a huge reduction, but it is always better than none.
The balance sheet is also very clean.
- No debt
- Increase in cash
- Consistent equity growth
No liquidity issues or major financial warning signs, and if you take a look at the investing and financing activities from the cash flow statement, it's straight forward and well managed.
Investing and Financing Activity
The Valuation Numbers
Here are some valuation multiples to check out.
Based on the TTM numbers, the valuation looks to be at one of its lowest points.
- Cash adjusted PE of 14
- EV/EBITDA of 7
- P/FCF of 15
But when you consider that the ROE and CROIC has been falling for 4 years, it does question whether the stock price will slide in the coming quarters. However, you can't deny that this is a profitable company. Achieving these types of returns with no leverage is impressive, regardless of what industry it's in.
I quickly pulled up 9 competitors to compare basic stats side by side to see what they looked like. American Public Education looks like one of the better companies in the group.
APEI Competitor Comparison
What's It Worth?
Performing a quick reverse DCF using the TTM FCF of $50.9m and a 12% discount rate, the market expected growth rate comes out to be about 8.5%.
APEI Reverse DCF
I used 12% as the discount rate because I don't like to complicate things. With the types of risks associated with American Public Education, I feel a 10-12% discount rate is appropriate. Here is a fuller explanation on how I think about discount rates. A concise version can be found on How to Value Stocks using DCF.
From a quick reverse DCF, the growth rate is fair.
Using the OSV stock analyzer to quickly calculate intrinsic value using various methods, here's what I get.
- DCF: $50
- Graham: $55
- Absolute PE: $53
- EPV with No Growth: $31
All the valuation methods are independent of each other. What I mean is that they don't use each other's inputs. So my estimate is that APEI is more or less a $50 stock. Include a margin of safety and it will have to come down before I can purchase it.
Visual Summary of American Public Education
Even if I did buy it, it would be a smaller position.
APEI Visual Investment Summary
APEI Stock Analyzer Report
Disclosure: No position