Perdoceo Education: The Fears Are Overblown

Summary

• Fears of an apocalyptic event due to Democratic leadership destroying for-profit universities is likely overblown, creating a buying opportunity for companies like Perdoceo Education.
• Perdoceo Education is diversifying its revenue streams, insulating against a perceived attack by a Democrat President and Congress on its primary business line.
• The company is certainly undervalued, but that doesn’t necessarily mean it’s a long-term hold as headwinds will still likely deteriorate revenues, profitability, or both.

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Investment Thesis

Perdoceo Education Corp. (NASDAQ:PRDO) has faced an uphill battle for many years, struggling to revive its revenue lines after a large decrease in student demand a few years after the housing crisis. Although revenue still is not back to where it was circa-2010, a focus on student retention and business efficiency has increased profit margins and return on capital. Despite this turnaround, Perdoceo’s stock price has continued to slump over the years and most recently the stock price slid due to fear that a Democratic President and Congress would put in regulations that would range from hindering Perdoceo’s business to outright destroying the for-profit university sector.

Source: Seeking Alpha

We believe these fears are largely overblown, and after reviewing Perdoceo’s balance sheet, the company appears well-insulated now and is positioning itself through acquisitions in an attempt to diversify revenue streams to insulate itself into the future. These factors mixed together mean Perdoceo is likely severely undervalued.

Company Overview

Perdoceo Education Corp. may not have a long and storied history in its current form, but before it changed its name from Career Education in 2020, the company was founded in 1994 and completed its IPO in 1998. The company grew quickly through an aggressive acquisition strategy, acquiring various other universities and upgrading their campuses. Career Education rapidly became one of the largest for-profit operators of universities in the country. Throughout its history, Perdoceo and formerly Career Education Corporation, offered degree programs ranging from Associates to Doctorate-level in fields ranging from business studies to healthcare to criminal justice. Perdoceo’s universities have a primary focus on adult and non-traditional students, and the company has continued its goal of growth through acquisitions, which we will discuss in more detail below.

Apocalypse Never: Fears of an Overreaching Government are Valid but Likely Overblown

The discussion around Perdoceo and other for-profit universities before the 2020 election was whether a Democratic President would completely dismantle all future business prospects for the industry. We can see a rather large drop off in share price when the results seemed to suggest a Democrat win for the White House. Now that the dust has settled, we can take a look at the actual risk this has posed and whether the fear was overblown from the beginning.

A quick search online including the phrase “Biden For-Profit Colleges” yields quite a few results suggesting that the Biden administration would come in and destroy for-profit universities like Perdoceo in one fell swoop. However, we also see headlines like the following:Source: Fox Business

The truth seems to be a bit muddier than what was originally presented; while the Democratic base appears to want to take down for-profit colleges, Democratic politicians seem to be talking a much harsher game than they are actually playing. It appears the Democrats likely will not be taking any immediate action that would completely cut off funds flowing to colleges like Perdoceo. However, what we may be seeing here is a death by a thousand cuts. Most recently in the headlines regarding this topic, we see for-profit colleges fighting back against their businesses being exempt from a bump in Pell grant funding in the Build Back Better Act. While this may not seem like it would have a big impact, if enough policies like this were to pass over a large enough period of time, it would certainly have an impact on the industry’s bottom line. Colleges live and die by where Federal funding goes to.

It appears that Perdoceo’s management may see this writing on the wall, as they have moved to diversifying their revenue streams, as we will discuss next.

Analyzing Recent M&A Activity and What It Likely Means for the Business and Its Future

The recent acquisition of Perdoceo that gained the most attention would be Trident University. This acquisition, while for a fairly large sum, appears to be mostly standard fare for Perdoceo as far as what Trident does. It is an accredited for-profit university that offers similar programs to the existing businesses that Perdoceo operates. The company rolled Trident under their American InterContinental University System (AIU) model and now “offers academic programs in the career-oriented disciplines of business studies, information technologies, education, health sciences and criminal justice.” Again, this layout is nothing new for Perdoceo’s business model. The acquisitions I want to turn our attention to were mostly smaller in size individually, but I believe they signal to investors where management may be taking the company and how they are planning on pivoting the businesses’ reliance on Federal funds. The two most recent acquisitions by Perdoceo are DigitalCrafts, an online coding, computer science, and cybersecurity bootcamp platform, and Hippo Education, which is a continuing medical education and test preparation platform. While management specified we should not see any immediate benefit from these acquisitions in terms of positive cash flow, what is noticeable about these acquisitions is how much different they are than the Trident acquisition. Bootcamps and continuing education platforms are not dependent on Federal funding for student loans and this shift tells us a lot in terms of what management is doing to insulate their position. Again, the revenues provided by these acquisitions are, for now, a drop in the bucket and are not likely to quickly convert to positive cash flow, but this does appear to be a testing of the waters by management to see how they can integrate different lines of business that still fit with their goal of supporting education endeavors for non-traditional students while reducing regulatory risks to their business model.

Additional Risk: Changing Student Wants and Needs

On Perdoceo’s most recent earnings calls, management mentions another risk: changing appetites for current and potential students. Although overall revenues increased substantially year over year from 2020 to 2021, overall enrollment declined. To make matters worse, management acknowledged that the only real reason for a revenue bump was the redesigned school schedules. Management claims this small decrease in overall enrollment is primarily attributable to marketing adjustments using data analytics that targeted a smaller segment of potential students that management felt had a better chance of succeeding at one of their universities, as well as technical issues stemming from Trident University that made it difficult for their registration portal for military-affiliated students. Let’s take a look at overall trends though, and see if we can uncover a different story. Over the course of the last few semesters, we can see that, while overall enrollment in colleges is declining, for-profit colleges lead the plunge.

Source: Higher Ed Dive

So, why are for-profit colleges losing ground in terms of new and returning students? While there’s likely not a single answer, there’s been no shortage of reports being released that detail how much more expensive for-profit universities are, their general ineffectiveness compared to nonprofit universities at ensuring students land a job after graduation, and all of the negative media attacking them and putting fear into prospective students that all for-profit universities are potential scams due to a few bad actors over the years. None of this is to mean that Perdoceo will face this issue of losing students long-term, but there does appear to be a secular move in place that potential investors would be wise to be aware of.

Valuation

Please take our valuation with a large grain of salt as the numbers used are largely not meant to detail actual potential business prospects; they are simply meant to show even in a no-growth environment, Perdoceo is simply wildly undervalued due to overblown fears. We put revenue growth at 0% over a 10-year period after the first forecast period, and net margins slightly improving over this period, due to management showing effectiveness in synergies through their acquisition strategy over the last few years.

Source: Author’s Model

Please see our financial model here to see our assumptions made: PRDO_Analysis__1_.xlsx

Without even taking into consideration the massive pile of cash that Perdoceo has amassed-- currently sitting at around half of their market cap-- the model yields a present value of Perdoceo’s stock price of $18, showing an immediate upside of ~80%. However appealing this may look on its face, potential investors still need to be aware that whether Perdoceo is a long-term hold or not will depend on the factors we outlined above: how much Regulatory risk affects their business over a long time horizon, and how effective they are in identifying potential acquisitions and utilizing their cash hoard they hold.

Key Takeaways

There’s certainly no denying how undervalued Perdoceo looks, just from glancing at a simple DCF model. However, potential investors need to be aware of the risks the company faces, from waning interest in for-profit colleges for varying reasons to regulatory risks potentially completely decimating Perdoceo’s business model. Again, we point to our belief that these fears are overblown for reasons outlined above. Also, even taking regulatory fears out of the equation, Perdoceo’s management has shown indications of pivoting into business lines where they would be more insulated from the threats of government taking away Federal funds that they currently largely rely on.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of PRDO either through stock ownership, options, or other derivatives. 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.