I am of the opinion that if you can get on the same side of a trade as Goldman Sachs (GS), then you are virtually in a no-lose situation. Goldman has proven time and again that when it's involved in a deal, it makes money. If the investment bank holds a position in a stock, then you want to be in that stock, particularly if you can get in slightly above or even below the price it got in at. It may not be a stock you buy and hold forever, and it certainly isn’t a short sale, but it is an intermediate-term hold that will likely pay off.
Likewise, if Goldman sells its stake in a company, not only do you want to sell out, but it may also be an indication not to buy if you were considering doing so.
Providence Equity Partners and Goldman purchased for-profit post-secondary education company Education Management Corporation (EDMC) in 2006, then spun it off in 2009, with Goldman maintaining a 38% position. The stock went public at $20 and traded in the mid-20s. However, rumblings inside the Department of Education that threatened the business model of for-profit schools sent shares of all the sector’s stocks plummeting recently. At one point, Education Management traded at $9 per share.
However, new government regulations have turned out to be not as onerous as feared, and the stock has come roaring back to $24. Now investors still have a chance to jump in alongside Goldman Sachs, which bumped up its position to 41%.
Providence and Goldman obviously saw, and still see, something in this company that the market is missing. I believe it’s because Education Management’s schools operate in different specialties than competitors like DeVry (DV), Career Education Corporation (CECO) and Strayer Education (STRA).
Education Management specializes in the arts, offering undergrad and master's degree programs as well as non-degree programs in interactive media, and web and graphic design. These specialties are in high demand, and demand will only increase as the Internet evolves. To diversify itself, however, Education Management also offers degrees in nursing, business, and education.
It’s also wise to note that there is a secular trend in this sector that is favorable. State budgets are a nightmare, and there are cutbacks happening across the entire strata of community and state colleges. Demand remains high for degrees that can translate into employment, so as long as the government is offering student aid (which it will as long as the for-profits meet the new thresholds set by the government), that demand will remain. employment, we think the growth prospects of these institutions remain favorable.
How is this actionable?
The company grew earnings by 60% to $160 million in the 2009-10 FY, and so far it's boosted earnings 20% in its first three fiscal quarters of this year. I expect it to hit $240 million in earnings this year, growing 50%. That’s $1.80 per share, giving the company a 13.5x multiple. Even if we back off to a 20% average annual growth rate after that, and give the company a conservative 20x multiple, I say the company is 50% undervalued at today’s price of $24.33. Add in 20% growth over the following five years, and you’re looking at a price target of $90.
That is why I think Goldman is holding onto its stake, and why I think Education Management is a buy.