As Bridgepoint Education (BPI) was getting slaughtered today, I bought a few shares at $9.80. Why did I do that?
Sure, with the news that Bridgepoint could have a problem with its Higher Learning Commission (HLC) accreditation after having failed the Western Association of Schools & Colleges (WASC) accreditation, one could imagine a scenario where BPI would head to zero. Or at least to $7, which is its book value per share, with $7.80 being cash and investments. This could happen, because without accreditation, most students would be gone in an heartbeat.
So BPI's ultimate value revolves around the company being able to resolve its accreditation issues. Here, I subjectively expect BPI to solve those problems. I expect it because one of its two accredited schools, Ashford University, enjoys a strong reputation among its student population, something even the WASC report recognized. And these commissions are not in the business of closing down schools that the students believe are doing a good job, even if they might impose roadblocks to accreditation or require certain measures to be taken to maintain that accreditation.
But, although critical, my belief that ultimately BPI's accreditation troubles will go away is not really what motivated me to buy a small, long term position. It was the risk/reward ratio.
The downside from the present prices is probably limited to 50% or so. If BPI lost all accreditation, liquidating the company would be in the interest of the major shareholders. Given the cash and investments, it's likely that liquidation would still produce a significant payoff for existing shareholders.
As it stands, if we forget the accreditation troubles, BPI actually has the makings of a business that ought to trade at a very significant premium to the market. In short, BPI:
- Has no debt, but has significant cash
- Produces significant cash ($35-$75 million per quarter, free cash flow)
- Has a large online presence (98.8% of its student population is online)
- Is growing, even during a bad period for for-profit schools, and
- Has opportunities in an online marketplace that still has significant room for expansion
(Source: BPI's latest 10-Q)
Basically, it's a near-perfect business and story, one that could easily trade at a large premium to the market as a whole. Yet, due to the accreditation problems, it instead trades at a huge discount (forward 2012 P/E is 3.8). What this means is that the stock, without further problems, or if its accreditation concerns go away, can easily trade as much as five times higher.
BPI is a nice business with very serious problems. Today, the word is that it can go out of business. In the future, it can easily be lauded as an online education leader with strong fundamentals. This makes for a very favorable risk/reward ratio. As such, I believe that buying at the present levels makes sense, even if in the end, it may not turn out as I hope and believe.