Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
- Dividend yield of 4.80% within dividend shy education services sector.
- Growing student population and revenue at healthier negative rates than otherwise suppressed industry.
- Trailing price to sales of 0.74 with stock currently trading at 70% below all-time high of $12.
- Relatively affordable hybrid education model with seemingly satisfied student body.
- Risk/reward proposition of vulnerable financial aid component countered by excellent regulatory record.
National American University Holdings (NAUH) is the only U.S. major exchange traded microcap company in the higher education space with a recent market cap under $100 million. However, unlike many of its larger education services peers, NAUH is offering potentially attractive total return to investors from relative growth in revenues and student population, combined with a nearly 5% dividend yield.
The company's modest growth and high yield are countercyclical to recent industry trends where various competitor U.S. education companies have experienced recent one-year declines of as much as 25% in population, 18% in revenue, and 237% in earnings per share. As a group, the 14 publicly traded higher education providers tracked by Country View Capital Research are paying a market cap weighted dividend yield of just 0.45%, inclusive of NAUH's 4.80%. And despite an industry wide holdover of cash reserves from an enrollment boom during the Great Recession, nine of the companies are currently paying zero dividends to shareholders.
Granted, National American is not immune to recent industry struggles, namely regulatory compliance. Crisis management of a vulnerable area of federal financial aid compliance might be in order, specifically NAUH's current 90/10 ratio. This ubiquitous government calculation of how for-profit education companies derive tuition revenues is an opportunity for dramatic turnaround at a company with an otherwise impeccable regulatory record.
National American University Holdings, Inc. owns and operates National American University (NAU), a regionally accredited multi-campus domestic institution providing postsecondary education services primarily to working adults and other non-traditional students. NAU offers diploma, associates, bachelors, and masters degree programs in business, information technology, and healthcare related disciplines. The university offers its courses through 37 educational sites in Colorado, Kansas, Indiana, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota, and Texas; and online via distance learning service centers in Indiana, Missouri, and Texas. NAU also provides courseware development, technical support, and online class hosting services to various colleges, technical schools, and training institutions in the United States and Canada.
As of its most recent quarter ending November 30, 2013, NAU had 11,386 enrolled students: 2,625 students at physical locations; 6,853 students in online programs; and 1,908 students at hybrid learning centers attending classes at both physical campus locations and online. NAU supported the instruction of 4,551 additional students at affiliated institutions where NAU provides online course hosting and technical assistance.
The company also operates a real estate business, which accounts for less than 1% of revenues. This segment rents apartment units and develops and sells multi-family residential real estate in the Rapid City, South Dakota area. National American University Holdings was founded in 1941 and is headquartered in Rapid City. (Sources: Yahoo! Finance and NAUH)
Competitive Landscape: Elusive Population Growth
National American's recent one-year student population growth is -2.6% vs. a weighted average of -7.1% for its publicly traded higher education peers. The industry has experienced a one-year new student start growth of -7.8%. Curiously, NAUH is the only U.S. higher education company of the 14 followed that does not disclose new student start growth. According to Dr. Ronald Shape, chief executive officer, NAU chooses not to divulge this metric because "our hope is investors, as is the case with management, are focused on the academic quality of the institution."
Revenue per student for the most recent fiscal year was approximately $10,200; about 27% less than an industry peer weighted average of about $13,900. Trailing twelve-month operating margin also lags at 5.48% vs. 14.25% for the sector.
Value Proposition: Affordability Equals Student Satisfaction
Based on recent company disclosures of tuition prices, NAU's average cost per credit is $368. This compares to a weighted average of $404 per credit at select publicly traded higher education companies. In its most recent fiscal year, NAUH spent 22.6% of revenue on instruction, the lowest of its peers that collectively spent a weighted average 45% of revenue on instructional spending. Typically, instructional spending includes facilities, instructor salaries, and additional costs of delivering curriculum and other education services.
Using data from Niche's College Prowler, student satisfaction is slightly above average to the sector, whereas according to survey data at Glassdoor, employee satisfaction at NAU is below industry norms. Students are particularly complimentary of NAU's academic flexibility, online courses, and career services. Surveyed employees are more positive about work/life balance, culture, and compensation, than about internal growth opportunities and senior management. However, it should be noted that Dr. Shape receives a relatively high CEO rating of 65% from current and former staff represented in Glassdoor's survey.
Sector Risk: Anomaly of Single OPE-ID
National American's most recently published three-year cohort student default rate (US Department of Education FY 2010) is 24.6%. NAU uses a single OPE-ID, or Office of Postsecondary Education Identification number, assigned to its Rapid City, SD main campus. In effect, all NAU campuses are encompassed under one student loan default rate. Arguably, this can make it simpler for a company to administer its Title IV federal financial aid as authorized by the U.S. Department of Education (USDOE). But it can also be a disadvantage when calculating student loan default rates as the USDOE would ultimately see NAU as one institution. Theoretically, a sanction against the main NAU institution OPE-ID would be an action affecting all campuses (referred by the USDOE as "branch campuses").
Granted, exceeding 30% default rates over three consecutive years is a death nail for maintaining Title IV eligibility, but it appears NAUH has a manageable percentage. Achieving an outcome below 20% would be investor friendly in regards to sector risk considerations. A weighted average three-year student loan default rate for NAUH's peers is 21.4%.
On the other hand, per its recent 10-Q for the quarter ending November 30, 2013, NAU's 90/10 ratio, or the percentage of net revenues derived from federal financial aid funds on a cash basis, is an alarming 89.7%. Exceeding 90% for two consecutive years can result in loss of federal financial aid authorization at a for profit education institution such as NAU. In this case the entire company could theoretically lose its ability to award federal grants and loans to its students.
NAUH can overcome this impetus by collectively increasing scholarships, military student recruiting, corporate education partnerships, and student cash payments to inflate the 10% side of the ratio. In last year's 10-K, the company does present a valid example of third party collaborations to improve cash side tuition opportunities:
Third Party Relationships/Collaborations
We work with local businesses and corporations in the geographic areas where our educational sites are located to offer a variety of courses and schedule formats to assist busy professionals. For certain programs, we offer customized courses and schedules and on-site classes.
We also collaborate with a number of local and national entities to provide educational programs they desire. Examples of these collaborations include military memoranda of understanding and governmental and educational alliances.
Nonetheless, investors would be prudent to confirm the company is implementing effective strategies to dramatically reduce its 90/10 liability.
Most education companies have several OPE-IDs, which on the surface, manifest challenging internal controls from the enormous Title IV regulatory handbook. But only institutions under the umbrella of an affected OPE-ID would be susceptible to any sanction from the USDOE in regards to student loan defaults, 90/10 ratios, or program reviews (colloquial for federal audit of Title IV compliance of an OPE-ID main institution and its branch campuses).
In other areas of industry specific risk, NAUH's most recent quarter's bad debt on student tuition receivables was 2.6%, significantly better than a sector weighted average of 3.9%. Low bad debt at a college or university is often a reflection of happy students complemented by capable Title IV processing and effective cash collection procedures.
The company does not disclose its overall average graduation rates, but a cursory review of individual NAU institution consumer disclosures on its website or College Navigator show an above average outcome in student retention rates. Its overall graduate employment rate was recently reported at 89%, impressive in today's economic climate. However, universities that cater to non-traditional students such as NAU typically report placement rates for students already working in full-time positions "related" to their major at time of enrollment. To its credit, the company does disclose a more transparent "in field" placement rate of 67%.
Another indicator of sector risk is an education company's capacity utilization, or total square footage per student of its facilities footprint, owned or leased. NAUH is currently around 43 square feet per enrolled student, in line with a general rule of thumb of 40 square feet per student. It is worth noting that delivery models such as online or space intensive on campus offerings can drive a company's capacity utilization above or below the average. With a blended mix of online and on campus programs, NAUH appears to have an economically, if not academically, favorable use of its facilities.
Regulatory Exposure: Exceptional is Non-Negotiable
Potential 90/10 issues notwithstanding, NAUH reports no exposure from the four legged chair of regulatory oversight: accreditation, federal, state, and litigation. This is typically a sign that an education operator has adequate controls in place to manage the myriad of quality, regulatory and legal jurisdictions unique to the publicly traded education industry beyond Sarbanes-Oxley, Dodd-Frank, and the Securities and Exchange Commission.
Investors should hold regulatory exposure in high regard and take education companies to task when any inquiries or actions are reported. If investor activism was warranted in the higher education sector, this is the sweet spot. It is the primary intrinsic risk of the industry and its players. Conversely, NAUH to its credit, is one of only four major U.S. higher education companies (publicly traded on major exchanges) currently reporting no exposure from any of the four legs of the regulatory chair.
Fundamentals: Front Row Revenue Growth
Of the 14 publicly traded U.S. education companies, NAUH has the sixth highest one-year revenue growth of -3.85% vs. an industry weighted average of -4.3%; and the sixth best one-year earnings per share growth of -11.0%, about even with an industry weighted average of -9.4%.
National American's trailing current ratio (current assets divided by current liabilities) is 2.64, far exceeding a sector weighted average of 1.74. However, returns on capital of 5.71% and equity of 7.39%, are below industry weighted averages of 12.54% and 11.93% respectively. Investors focused on fundamentals typically prefer investor friendly returns on capital of 12% or greater, and returns on equity of 15% or higher.
Valuation: Price to Sales is Compelling
Although trailing price to earnings of 26.74 is significantly higher than a sector weighted average of 20.02, NAUH's enterprise value to EBITDA, plus collective price to sales, tangible book, and free cash flow are all compelling suggesting the stock is currently cheap relative to future growth potential. The price to revenue ratio of 0.74 places the stock in a value investor's wheelhouse.
NAUH's price to projected earnings growth (FYE) is 1.35 vs. a weighted average of 1.01 for the industry, suggesting the company might be slightly expensive looking forward assuming the projections are ultimately accurate. Regardless, a PEG under 1.50 is often intriguing to value or GARP (growth at a reasonable price) investors.
Margin of Safety: Free Cash Flow
I defer tangible intrinsic value price targets to sell-side analyst models and the brilliance of buy-side clients (and readers), but preferred data points illustrating intangible margins of safety are free cash flow, liquidity (i.e., a company's ability to pay long-term debt with current assets), beta, and overall market risk.
National American's free cash flow and corresponding yield to share price have been rising over the previous twelve months. Additionally, NAUH's long-term debt is trailing at just 27% of current assets, thus the company should have little problem paying down debt if it becomes prudent for management to do so.
Beta is a proverbial, if not controversial, measure of risk, but it is widely held that companies below 1.25 offer relative safety for longer-term investors. NAUH's beta currently stands at an appealing 1.14. Overall market risk for NAUH might be deemed "above average" simply because of its microcap status and the potential liquidity problems that can hinder timely trading of minimally capitalized equities.
Long-Term Potential from Quality Player
The opportunity in National American University Holdings lies in its positioning for a possible return to positive growth in population, revenue, and earnings. This could be accomplished from continued leveraging of its value proposition of a flexible hybrid learning model to satisfied students at competitive tuition costs. Maintaining attractive dividend yields would merely add to the company's prospect for total investor return.
Valuation multiples outside of price to earnings are compelling when compared to the education industry and the market as a whole. Price to sales is especially intriguing, begging the question, "How likely is a stock to return to its mean on the high end as well?" NAUH, which closed on Valentine's Day 2014 at $3.77 a share, traded at an all-time high of $12.00 on the very same universal day of romance in 2010.
Downside risk lies in how the company strategically manages its 90/10 federal financial aid ratio, which invariably comprises the entire company in a single calculation from the USDOE.
Conceivably, patient investors with a risk appetite for a low-priced microcap in a regulatory vulnerable industry, might benefit from this under the radar potentially sleeper stock.
Additional disclosure: Education industry weighted averages calculated as of December 31, 2013 courtesy of Country View Capital Research, LLC (CVCR). Industry data for illustrative purposes only. Accuracy of data cannot be guaranteed. Narrative and analytics are not intended for portfolio construction or as a solicitation to buy securities. CVCR and its founder, David Waldron, are industry experts and data providers, not investment advisors, and to maintain independence do not directly invest in any education companies followed. Article not intended as investment advice nor as a recommendation to buy/hold/sell/short or avoid NAUH or any other securities. Readers should always engage in further research and/or consider consulting a certified financial planner, licensed broker/dealer, or registered investment advisor before making any investment decisions.