Why Shorts And The Street Have It Wrong About Bridgepoint

Dec.14.11 | About: Bridgepoint Education, (BPI)

Shares of Bridgepoint Education (NYSE:BPI) have struggled to maintain any significant momentum despite stellar operating results. Questions about the for-profit education model and potential government policy changes regarding the for-profit sector have scared investors away from these excellent businesses. For instance, in 2010, BPI grew revenues by 57%, had a 30% EBIT margin, and had EBIT/Assets (rough approximation for ROIC) of greater than 100%. Most businesses struggle to achieve a 10% ROIC. Despite that stellar performance (and continuing success), the stock sits with a PE to 2010 earnings of 8.4X. The PE for consensus 2011 earnings sits at 6.9X. Moreover, the company, as of 9/30/2011, sat on $344.7 million of cash and marketable securities. Backing out cash of $6.10 per share, the PE on 2011 earnings is 4.9X. With the market trading at near 13X, clearly Bridgepoint doesn't get credit for having an outstanding business. Finally, with a small float -- Warburg Pincus, a highly regarded private equity fund owns 61% of the outstanding (diluted) shares -- nearly 65% of the float outstanding has been shorted. Simply put, there isn't much love for BPI.

Next year, the street has modeled in a significant deceleration in revenue growth. In Q1, Q2 and Q3 of this year, revenues have grown 47%, 38% and 27%, respectively. Next year (2012), the Street expects revenue to grow a measly 4%. That is quite a slowdown, and probably accounts for explaining part of the low PE that BPI has.

However, I believe that revenues next year will likely be much higher than current expectations. Bridgepoint employs "Admissions Counselors" to find and enroll new students. Simply, admissions counselors fuel the growth of Bridgepoint's student population. More admissions counselors has historically correlated amazingly highly with more students, and thus more revenues. The logic is pretty simple.

Here is a table showing the correlation between admissions counselors and the revenues they produce in the following year. (The 10-K discloses admissions counselors employed at the end of each year). BPI - correlation between admissions counselors and revenuesClick to enlarge

In the most recent 10-Q Bridgepoint management gave the following clues regarding the pace of admissions counselor hiring (emphasis mine): "We plan to continue to invest significantly in admissions counselors as well as in online and other advertising." They also provided a significant clue that admissions counselor efficiency (the number of new students per admissions counselor) is holding up rather well. This means that ratio in the above table should be relatively stable. They stated,

"In the Quarterly Report on Form 10-Q for the three months ended June 30, 2011, we disclosed our expectation that admissions counselors' new enrollment productivity would decline in the second half of 2011 as a result of the changes in compensation methodology required by Department regulations that became effective on July 1, 2011. However, after a full quarter of observing admissions counselor productivity, we believe that such productivity decline will be less than previously expected, and we expect that the growth in new student enrollments will become positive again in 2012."

This likely means that management is more bullish about 2012 and the productivity of their admissions counselors. In other words, if they are going to "invest significanty" in admissions counselors, and their "productivity decline will be less than previously expected," things should be looking up at BPI.

To try and ascertain where admissions counselor levels are throughout the year, I have developed a proprietary jobs index for Bridgepoint. Using data points from around the internet regarding job openings at Bridgepoint and its subsidiaries, I make calculations to estimate the number of admissions counselors. While this methodology is estimated, I believe it is fairly reliable given past performance and correlation with industry data points and events. One can see on the following chart the proprietary index vs. disclosed datapoints over the time period I have been collecting the information.

Bridgepoint Proprietary Jobs Index vs Counselors vs RevenuesClick to enlarge

So, it appears that, according to my information, Bridgepoint has accelerated the hiring of admissions counselors in the latter part of this year. This correlates well with their statements in the Q3 2011 10Q. This should lead to very good results in 2012 based on management's statements regarding the productivity of those admissions counselors.

Finally, the green data points on the above chart show subsequent year revenues (right-hand axis). The correlation, relative to admissions counselors at year end, is striking. Also of note is the proprietary jobs index data point most recently collected for year end 2011 (furthest red point to the right, y-axis is left-hand axis). This should correlate with 2012 revenues. The last green dot on the right represents consensus 2012 revenues according to Yahoo Finance. As most of the green dots have been above the red dots (counselors) on this graph, one can see that consensus revenue estimates for 2012 appear to be way too low! As seen in the table at the beginning of the article, annual revenues have been running around 55-60% of the prior year ending admissions counselors. The latest Proprietary Jobs Index is above 2150. Being conservative and multiplying the 2150 * 55% gives $1,183 in expected 2012 revenues according to this index. Thus, my estimate for 2012 revenues is currently 22% above consensus estimates ($966.8) on Yahoo.

Therefore, I think the shorts and the Wall Street analysts have got it all wrong on BPI. I think BPI does $3.80 in earnings next year. At a 12 multiple, that is a $45.60 stock. Add in $6.10 in cash currently on the balance sheet, and I give this stock a target price of $51.7, or nearly 150% above today's price.

Disclosure: I am long BPI.

Additional disclosure: I believe the information above to be accurate but make no representations or warranties regarding the data, or its ability to forecast results for Bridgepoint Education, or any other company.