Nobel Learning Communities: Go For The Prize

| About: Nobel Learning (NLCI)

Education has been a minefield for investors and has lost much of its luster in recent years. Remember Edison Schools, Inc.? This is the company that was going to revolutionize public school education by managing schools better. Its shares hit a high of $40 before plunging to $0.14 and being taken private at $1.75 a share in 2001. As a private company, it has moved away from managing schools to providing supplemental educational services.

Federal investigations of everything from student loan abuses to inflating enrollment figures hit stocks like Computer Learning Centers, now bankrupt, and ITT Educational Services Inc. (NYSE: ESI), taking the shine off the for-profit publicly traded education company and keeping the sector somewhat undervalued.

Some companies are trying to buck this trend. One of them is Nobel Learning Communities, Inc. (Nasdaq: NLCI). The operator of more than 150 private schools in the pre-school through middle school range reported significant double-digit increases in revenue and income for the fiscal third-quarter ended March 31, on top of regular gains in previous quarters. After hovering around $10 for nearly two years, the stock has moved upward in the past six months and now trades above $15, giving NCLI a market cap of $160 million. The 52-week high was $16.34 in March and the low was $9.98 last August.

The company has a new $50 million financing in place and is ready to take advantage of growth opportunities. After selling one school in the third quarter, the company announced in May the sale of six schools that had been targeted for sale as part of the company’s divestment of non-strategic assets. The schools that were sold had been a drag on earnings. Net proceeds of $2 million in the six-school sale – yielding an after-tax gain of $600,000, or $0.05-0.06 a share, for the fiscal fourth quarter ended June 30 – were used to pay down remaining debt under the facility so that the full amount is available for future acquisitions or capital expenditure.

In the third quarter, net income was $2.5 million, up 42% from $1.8 million in the year-ago period. Earnings for the quarter on a fully diluted basis rose 28% to $0.23 per share from $0.18. The figure includes a net $0.02 per share benefit from a pre-tax gain of $814,000 on the sale of the school, offset by a pre-tax charge of $341,000 for accelerated depreciation. Earnings from continuing operations were $0.19 per fully diluted share in the third quarter, compared with $0.19 in the year-ago quarter. The share count was 7% higher in the fiscal 2007 quarter. In the quarter, the company converted its preferred shares to common shares, so that it will save the 5% dividend that was paid on the preferred shares.

Revenue in the third quarter rose 17% to $49.2 million from $42.2 million, reflecting an increase in the number of schools operated, annual tuition increases of approximately 3.5% to 4.0%, increases in comparable school enrollment, and the effect of acquisitions.

The company has registered significant improvement in gross margins, as it transitions its portfolio of schools to a predominately private pay platform while leveraging fixed costs across a broader base. Even with investments to improve the quality of school staff, gross profit in the third quarter was $8.5 million, or 17.2% of revenue, up from $6.6 million, or 15.6% of revenue.

Nobel Learning Communities hasn’t drawn much attention from analysts. Kansas City Capital's Jonathan Braatz, the lone analyst covering the company, has it at a “strong buy,” with a target of $18. Braatz's earnings target for the year ended June 30 is $0.73, compared with $0.38 ($0.49 from continuing operations) in the first nine months of fiscal 2007 and $0.45 for all of fiscal 2006.

Based in West Chester, Pa., a suburb of Philadelphia, Nobel Learning Communities operates schools for about 25,000 students in 13 states – on the Eastern seaboard, the West Coast, Nevada, Illinois and Texas. The company has now implemented a cluster strategy – grouping schools in targeted demographic areas, so that it can feed students into other group schools and benefit from cross-marketing. Brand names include Chesterbrook Academy, Merryhill School, and Evergreen Academy as well as Paladin Academy for the learning challenged and Houston Learning Academy, a group of special purpose high schools.

Nobel Learning Communities is not without its fans. Former junk bond king Michael Milken and his brother Lowell have been longtime investors, along with Oracle Corp. (Nasdaq: ORCL) CEO Lawrence Ellison. Insiders have been buying the stock during the recent run-up.

As will happen in undervalued sectors, private equity firms are sniffing around education stocks, including Nobel Learning Communities. Last week, a management group backed by Kohlberg Kravis Roberts and other private equity players announced the success of their $3.8 billion buyout of Laureate Education, Inc. (Nasdaq: LAUR), formerly part of Sylvan Learning Systems. The Sylvan tutoring business, operated by Educate Inc., which traded on Nasdaq under the symbol EEEE, went private in June.

Also last week, Camden Partners, a private equity group with a stake in Nobel Learning Communities, floated Camden Learning Corp. as a so-called blank-check company to invest in education companies, hoping to raise $36 million in an initial public offering (though the SEC filing specifically says the new company will not seek a “business combination” with any company the private equity group has invested in). Camden Partners’ David Warnock sits on the Nobel Learning Communities board.

The Camden offering calls attention to the growth of the education sector as global competition increases the need for a skilled workforce in a services-based economy, and the sizable role that private funding plays in U.S. education. The presidential campaign also is focusing a lot of attention on education. Nobel Learning Communities might be the right choice for investors looking for the prize.

NLCI 1-yr chart


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