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Joseph Malvern
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I manage a family-owned investment fund. Most of my investments are long-term holdings.
  • LRN 0 comments
    Jan 11, 2011 1:33 PM | about stocks: LRN

    I have been analyzing LRN which is the ticker for K12 Inc.  I have always liked what they do and have followed them since their IPO, but am puzzled by the recent surge in stock price. 

    The most important reporting date for LRN is in November when they announce their new enrollments, 1st quarter earnings, and full-year outlook.  Prior to their 1st quarter earnings call on November 9, the stock was trading in the $28-29 range.  On the November call, LRN reported earnings of $0.07 vs. the consensus of $0.29 for Q1.  As you would expect the stock dropped into the $23 range.  Since then with no new news, the stock has surged to over $31.

    Now here is the part that I don't get.   First real enrollments were up only 18.9% first the prior year, despite adding several states include MA which I thought would be huge.  It seems like the growth rate for enrollments is declining.  When I first heard about LRN, they repeatedly said that they would grow 25-30% per year through new state expansion.  So organic growth seems to be declining.

    Second, the operating income doesn't make sense.  In 2010, the company did $35.5 million in operating income.  This was up 58.8% over 2009.  For this year, the company is saying that they will do $28.0 million for the year, a decline of 21%.  Even that, however, seems like a stretch.  Here's why:

    When you look at the quarters, Q1 2011 represented the Company's worst 1st quarter since 2007.  K12 always makes most of their operating income in the 1st and 2nd quarter.  In 2009, 41% of their Op Inc. came in Q1 and 68% in the first half of the year.  In 2010, 36% came in Q1 and 76% in the first half of the year.  For this year - Fiscal Year 2011, the Company made only $5.4 million of operating income which represents only 19% of their full-year guidance number.   It is hard to see how they even get to the $28.0 million unless they make about $14 million in Q2.  They did make $14.3 million in Q2 in 2010, so that is possible, but it would mean that Q2 represents 50% of their full-year number. 

    I suppose it is possible that Q1 was hit with a lot of one-time costs related to all of the acquisitions they have done lately.  However, that scares me a bit too as up until now, I believe that all of their growth was organic.  Integration costs are always higher than a Company expects and they persist longer than anticipated.  Does the company have the processes to manage integration.  It seems like they would have done a better job of detailing the one-time costs and anticipated integration costs in the 10Q and on the earnings call if they had a good handle on them. 

    So all of these factors: 1) slowing organic enrollment growth; 2) a dramatic Q1 miss; 3) acquisition risk; 4) a 22% decline in year over year earnings per their guidance; and 5) no new news since the 1st quarter earnings call except for lots of insider selling, justify a $250 million increase in market cap since November.

    It will be interesting to see what Q2 looks like.  Would love to hear other views on this.

    Stocks: LRN
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  • I want to like LRN, but having a time understanding how they missed their quarter by a long-shot and yet stock surges to an all-time high.
    Jan 11, 2011
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