Nord Anglia: Visible Growth Ahead

| About: Nord Anglia (NORD)

Summary

One of a kind company with a big market lead.

Huge potential growth still in front of them.

Very consistent organic growth matched with a strong ROI acquisition strategy.

Nord Anglia Education (NYSE:NORD) is the type of true growth story that investors typically look for, do the work, and tuck away in their portfolio.

I recommend you do the work yourself to come up with a your own critical opinion. Whatever you do, do not watch the company's video before you make an informed decision. The video touches on too many emotional buttons that you can't hope to make an analytical decision. Instead you'll end up throwing away any of your work and will buy the stock anyway. So my advice is do the work FIRST. Thankfully I saw the video after I did the work, but came to the same conclusion anyway, which is that the company has strong upside ahead. Full disclosure; I did have to look at some of their presentations. If you do, there are plenty of little faces you may fall in love with, so please use caution.

Nord Anglia provides English style education in the English language around the world with growing exposure to China and the Middle East.

Strengths of their story

*Not many major players to compete to within a fragmented market.

*Teachers want to teach there so they get their pick of the best teachers. The number of top teachers that are finding out about Nord Anglia is accelerating.

*There are growing incomes in developing markets where parents want to spend on their children to be able to compete in a global market. Nord Anglia gives parents hope that their children can break out of their country's system. McKinsey wrote a report about ways companies can capture this growing population and much of their advice paralleled Nord Anglia's strategy and target.

*Their students typically outperform state averages.

Impressive Organic Growth

Before we focus on the acquisition strategy we want to focus on their organic growth. Most of the topline growth is coming from the acquisition strategy, but an outweighed portion of profits is likely coming from squeezing returns out of existing properties.

Organic revenue growth, which we are calling same-store-sales has been up 10% or more for 5 quarters and accelerated from the quarters before that. We believe that is coming from enrollment growth and seat count increases along with pricing.

The sheer consistency of this piece of the model shows the strength of the company as leading 'operators.' It's rare in any industry to find such consistency in organic growth.

The company says that they have 35,000 students and room for 49,000, which gives investors organic growth visibility. As they acquire new locations this 'room for' number will increase.

Strong Returns From Acquisition and New Schools

Their main leg to growth is their purchase of other schools and turning them into their system of teaching.

For degree, total revenues grew 60% last quarter, of which 10% was organic. The rest is mostly from acquiring other schools and new builds.

The company stated publicly that they have a long list of new school (they call greenfield) and acquisition opportunities, which gives investors visibility of growth for some time.

Greenfields have ROIs of over 70% in about 4 years. Our guess that comes out to 20% return a year from the start.

Acquisitions may have similar, or our guess, higher returns because they say their payback is 1-4 years. That means they return their money back in 1-4 years making it 25-100% return metrics.

We think because of the unique business strategy, they don't have much competition for their target list and schools are happy to sell. Then, when Nord Anglia plugs the school into their system, they ramp up enrollment and pricing seeing the returns ramp quickly.

This gives the company three strong profit drivers: organic, greenfield and acquisition.

Strong Management With Strong Return Metrics

Overall, the company looks at each new project with an eye on ROI. They need an ROI of 50% to enter the project. We believe that to mean that they need a 50% return over the course of 1-5 years but they are seeing that in the shorter end of the time frame on average, giving each new project high annual return metrics.

Strong Earnings Growth

The company is guiding to .67-.72 in earnings for F16 up from .47 a year ago or roughly 50% earnings growth at the mid point.

Last year's .47 was up from .27 or 74% earnings growth, which was up from a loss of about .01 the year before.

They mentioned on last earnings that FX was leading them to the low end of the earnings range so far. That said, with currency fluctuations of late we think there is a chance that can even out.

Valuation

If they can maintain the 30-50% earnings progression we think the company deserves a higher multiple. They are selling off the school physical assets in favor of leasing and are focused on managing the company for higher returns.

Based on the growth rate we think we can give them a 20-30 multiple on out numbers. At a 25x midpoint on next year's numbers of $1.00-1.20 we think we can get to $25-30 stock up from the $20 price currently. We think there is further to go given the clear runway they have ahead for growth, but at this time to pinpoint a number we think the stock has 25-50% upside from here.

That's not really asking for that much. The stock was at $27 last year. If you assume there is continued growth ahead it's fair to think that the investors that bought it up to $27 will be willing to buy it passed there especially after a couple of more years of strong growth.

Risks

Being an internationally exposed company they have to deal with many international governments that can change quotas and standards very quickly. An appetite for an English education by Eastern and Middle-Eastern governments can change at any time which the company is and needs to continue to monitor.

Conclusion

There are many stocks to choose from but we are always trying to find the true growth story with a strategy and a target market that makes sense. Nord Anglia fits that profile with the potential to be a core growth position potentially for years to come.

Elazar Advisors, LLC specializes in earnings and predicts, analyzes and reacts to earnings and earnings events as well as developing current company and macro stories with a hedge fund perspective.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We may buy the stock at some point.