Bridgepoint Education: A Solid Value Play

| About: Bridgepoint Education, (BPI)

Bridgepoint Education (NYSE:BPI) is a leading provider of education services. The company offers associate, bachelor's, master's and doctoral degrees in nearly every subject of study. Bridgepoint provides education for nearly 66,000 students online, and has programs at two traditional campuses: the University of the Rockies in Colorado, and Ashford University in Iowa.

Since Bridgepoint became a publicly traded company in the spring of 2009, the company has seen huge numbers in growth. Although this growth is nice for shareholders at the moment, you can expect growth to level off a bit and become a bit more sustainable. However, with a projected long term EPS growth rate of 21.7%, there does not seem to be any signs of slowing down. As you take a look at the table below, you can see the substantial growth that Bridgepoint has had in revenue, income, and EPS.

Growth 2007 2008 2009 2010
Revenue 86 218 454 713
Net Income 3 26 47 128
EPS 0.01 0.13 0.74 2.14
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As we shift toward margins and returns, Bridgepoint is equally as impressive. In the table below, I've compared the profitability metrics of the company to a lead competitor, Apollo Group (NASDAQ:APOL), which is currently trading double that of Bridgepoint. I would like to point out that the high return on equity is due to the fact that Bridgepoint just recently bought back a number of shares, skewing the number a bit. Nevertheless, this firm has some of the highest margins in the industry.

Profitability BPI APOL
Net Margin 19.5% 10.6%
Gross Margin 73.3% 61.3%
Operating Margin 31.3% 17.9%
ROE 66.7% 31.8%
Financial Leverage 1.84 2.27
Asset Turnover 1.86 1.45
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By projecting free cash flow out for the next ten years and using a 10% growth rate and a 12% - 15% discount rate, I determined that the intrinsic value for Bridgepoint is between $49.59 and $68.95. Although the company has seen an average growth rate of 34.5% for FCF over the past three years, I decided to be conservative with a 10% growth rate. I feel that this gives a range that we can all agree on. If a 15% growth rate were to be used instead of 10%, which I think is attainable, Bridgepoint could trade in the range of $68.79- $98.11. Given the current share price of about $26.40, it is clear that this company has tremendous upside.

As with any stock, there obviously comes some amount of risk. Education is a highly regulated sector, and regulations such as debt/income ratios and repayment rates could force tuition lower. However, Bridgepoint seems very capable of getting past these issues in the long run. The firm continues to see an increase in enrollment, while others are seeing a decline. Bridgepoint also has higher repayment rates from students compared to competing companies in the industry.

In conclusion, BPI is trading at about $26.40 a share. It has seen major growth in revenue, income, EPS, and FCF. It is a highly profitable company with high margins and returns. The company currently sports a P/E of 8.6, compared to the industry average of 14.7, as well as no debt on the balance sheet. At the very least, the company is trading at an 88% discount when compared to the intrinsic value.

Any way you look at it, BPI is an undervalued company with a high upside, making it a solid value play.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BPI over the next 72 hours.