Lincoln Educational Services Has As Much As +185% Upside And Will Benefit From Slowing U.S. Economic Growth

Summary

• LINC student starts have been positive for 6 straight quarters.
• Each incremental dollar of revenue flows through at 40-70% rate.
• Expect the Company to be GAAP net income positive for 2019.
• The US economic data continues to decelerate - it's time to look for countercyclical stocks like LINC.

Key Stats: Lincoln Educational Services Corp.

May 23, 2019

Price: $2.87

Market Cap: $70m

Enterprise Value: $72m

3-Month Average Volume: ~10,500

FY 2019e EBITDA (EV/EBITDA): $12.5m (5.4x)

FY 2020e EBITDA (EV/EBITDA): $17.1m (4.2x)

FY 2021e EBITDA (EV/EBITDA): $25.4m (2.8x)

Valuation range based on 8x: $4.00 - $8.25 per share or +39-185% upside

Thesis

After several years of working to sustainably improve student starts (the key leading indicator), there is mounting evidence that Lincoln Educational Services Corp. (NASDAQ:LINC) will achieve this going forward. In fact, the Company has experienced positive student starts for six straight quarters, and I expect Lincoln will report positive student starts for a seventh straight quarter when it reports Q2 2019 results. For the past several quarters, management has maintained its expectation of turning GAAP net income positive for fiscal 2019. This outcome is well within their control, given fiscal 2019 started with a higher average student population (> 750) due to the multiple quarters in a row of positive student starts. The beauty of a business model like Lincoln’s: when revenues are growing (even marginally), the inherent leverage of incremental sales to the operating line is substantial.

Justyn Putman, Talanta on Q4 2018 Conference Call

I was wondering if I could get a sense of what you think your kind of incremental contribution margin is for new students coming in now. I think we talked about that in the past, but I was just going to see what your thoughts are now.

Scott M. Shaw, CEO of Lincoln Education

Sure. I mean, again, that is where we see benefit going to the future. Historically, we've seen numbers ranging from 30% to 70% depending on where we are in the cycle and where individual campuses are. I certainly would anticipate focusing on the lower level of that range going forward, and that's kind of what we're

Analyst’s Disclosure:I am/we are long LINC.

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