|Shares Out. (in M):||61||P/E||7.5x||8.9x|
|Market Cap (in $M):||1,300||P/FCF||7.1x||9.9x|
|Net Debt (in $M):||0||EBIT||274||232|
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We are recommending a long investment in Bridgepoint Education, Inc. (“Bridgepoint”, “BPI”, “Ashford”, the “Company”). Bridgepoint Education provides postsecondary education services through its regionally accredited academic institutions, Ashford University and University of the Rockies. Bridgepoint’s institutions deliver programs primarily online, however, a small percentage of their students attend the University of the Rockies (BPI’s traditional campuses). As of December 31, 2011, we had 86,642 total students enrolled in our institutions.
We believe Bridgepoint’s focus on efficiency, technology and innovation provide the Company with a lower cost structure. This cost structure enables the Company to charge substantially less than its for profit peer group and generate a comparable level of EBIT per student. Additionally, the amalgamation of BPI’s: affordable tuition, high transferability of credits, an accessible educational model, and a heritage as a traditional university are key differentiators which lead to above industry satisfaction levels (Net Promoter score of 75% versus an average of 52% for peer group) that will enable the Company to continue to gain share. The Company currently trades at 8.0x PE, 6.1x PE (ex net debt), and 3.1x EBITDA based on our forward projections. With >50% of the shares sold short and ~8/share in cash (~31% of the market cap), the stock could appreciate quickly in the event of positive news or the Company using its cash position to purchase shares. We value the Company with a 1 year forward price target of $34 per share or ~57% upside to the 4/18/12 closing share price.
As some exhibits from our write-up can't be pasted in here, please refer to the write-up and the model at below links for more detail/better readability.
Efficient Education Delivery and Marketing Platform: BPI’s operating cost per student is about 33% below its for profit peers, we believe this is due to Bridgepoint’s focus on efficiency, technology and innovation. This low cost position allows the Company to charge lower tuition rates. BPI generates ~$10,600 in revenue per student vs. ~$15,000 for the industry. Affordability is one the key reasons why students select BPI. We also believe the Company’s low cost position/price position translates into a higher conversion rate of leads into new students. This marketing efficiency is highlighted by BPI’s 2011 and 2010 sales & marketing cost per start of $2,600 and $3,300, 13% and 33% lower than the University of Phoenix, respectively. This efficient operating model allows BPI to generate more EBIT per student despite charging materially lower prices.
Compelling Value Proposition to Students: We believe that BPI’s value proposition is differentiated in the for profit education space. This is supported by the results from BPI’s annual alumni survey:
We would note that these results are consistent with other third party surveys we have been exposed to over the years. We believe these results are driven by the amalgamation of BPI’s: affordable tuition, high transferability of credits, an accessible educational model, and a heritage as a traditional university:
Technology Driven Culture: We believe that one of the reasons for Bridgepoint’s lower cost structure is its focus on innovation and technology. BPI’s innovative culture is highlighted by its e-books initiative Constellation (launched for students at other institutions at the Consumer Electronics Show in Las Vegas earlier this year under the brand “Thuze”). Constellation provides web- based course materials that include both text and multimedia assets Third- party textbooks have typically cost online students $150 per course; however; Constellation materials replace those textbooks, at cost of $75 per course. As of December 31, 2011, BPI had introduced 32 courses on Constellation. BPI plan’s to include core courses in approximately 80% of degree programs over the next two years. The Company has also developed Waypoint Outcomes, which provides learning and assessment software to K- 12 and higher education institutions nationwide (~40 traditional institutions use Waypoint). The software combines classic rubric grading scales with easy, efficient technology to help educators teach writing, critical thinking and cognitive skills. While we estimate Waypoint and Constellation respectively represented <1% and 1.8% of 2011 revenue, these technology initiatives could represent could represent new areas of earnings growth through lower costs at BPI and incremental revenue from other institutions.
Cheaper Alternatives and Non-profits Could Potentially Take Share from BPI: We think Bridgepoint’s price point is being increasingly challenged by American Public Education (now at 45,000 civilian students) and nonprofits that continue to add online courses and improve their search engine marketing and increase their purchase of leads. While Bridgepoint is one of the lowest cost for profits, there are a number of nonprofits that are less expensive than BPI. Ashford’s cost per credit (including all mandatory fees and assuming a 120 credit hour bachelor’s degree) is ~$402, Western Governor’s University (WGU) is $193 per credit, Troy University is $260, Southern New Hampshire is $311, Liberty is $354, and Arizona State is $425. We think the growth of better branded, similar or lower cost nonprofit alternatives could negatively impact Bridgepoint’s growth in the future. We think bachelor’s completion programs and master’s programs are most at risk from the rise of nonprofit competition; based on conversations with industry executives, the overlap between the nonprofit and the For Profit addressable markets is anywhere from 30% to 40%. However, we believe the addressable market is large and BPI is well positioned to continue to take share from traditional for profits and non-profits. We note that recent reviews of Google keyword searches and traffic comparisons on Alexa suggest that BPI is continuing to maintain its momentum.
Legislative and Legal Risk: Senator Tom Harkin’s HELP (Health Education Labor and Pensions) committee hearings on the for-profit higher education companies during the summer of 2010 have increased the risk of legislation that may be unfavorable to for-profit higher education companies. Testimony provided at these hearings, including a GAO report on its undercover testing of the marketing practices of for profit schools, may also increase the risk of law suits against for-profit schools, which could be negative for the stocks of for-profit schools. We believe the primary sources of regulatory risk faced by the Company relate to Cohort Default Rates, Gainful Employment, the removal of incentive compensation safe harbors for recruitment advisors, compliance with the 90/10 rule, Pell Grant funding, and accreditation (discussed separately as this is a risk unique to BPI). We believe BPI’s lower cost structuring and lower priced model have better positioned the Company for risks related to changes in the Cohort Default rules and Gainful Employment. We also believe that the Company has implemented a number of operational changes to manage these risks and the impact is largely internalized in the current financials as 2012 guidance implies a ~7.5% lower EBITDA margins vs. 2010 levels. For context on operational changes the Company: 1) Raised minimum age requirement for Associate’s degree program from 18 to 22 years (early 2010) 2) Introduced mandatory full attendance requirement in first course to continue in program (2Q10) (3) Launched first phase of an orientation pilot program for students with less than 24 credits (3Q10). (4) Launched second phase of orientation program with a full roll out expected in 2H11 (2Q11).
WASC Accreditation Process: Bridgepoint’s Ashford University is in the process of applying to change its regional accreditor from the Higher Learning Commission of the North Central Association (HLC) to the Commission for Senior Colleges and Universities of the Western Association of Schools and Colleges (WASC). We expect a decision at WASC’s commission meeting scheduled for June 13, 2012. We believe Ashford will be successful in receiving WASC accreditation, but would not be surprised if there were a couple of “riders” to the approval (related to process, not growth):
However, WASC accreditation is not a certainty and while there are a number of options available to BPI in the event of non-accreditation (not discussed in this report), the effect of non-accreditation would be catastrophic for the stock. In the event of failure to receive accreditation we would value the stock at ~$8 (value of the net cash on the balance sheet; share holders equity is ~$6.3 per share). We note however that Ashford would still have HLC accreditation through 2015. Our projections have the Company generating an additional an additional $566M of cash flow during that period, or ~$10 per share (these projections would have to come down as the enrollment base would likely decline if Ashford is going to lose its accreditation).
Warburg Pincus Overhang: Warburg owns 34.6 million shares or about 57% of the fully diluted shares outstanding. We believe they are disciplined long term investors, but we also believe they will likely sell a portion of their holdings at some point. Recently Warburg filed an S-3 requesting that these shares be registered and available for either distribution or sale. However, the Company’s large cash position does create an opportunity to reduce the private equity overhang via a negotiated repurchase. In an extreme example BPI could use its cash and marketable securities to purchase 58% of Warburg Pincus’ stake (assume $407 million in cash is used to purchase shares at a 5% discount to 4/18/12 closing price of $21.41). In this scenario, the Company would $3.87 of EPS vs. the $2.50 midpoint of the Company’s guidance. This implies a 55% increase over 2012 EPS guidance and 5.5x PE multiple. Note that while we do not expect the Company would use this large a percentage of its cash balance, the example highlights the impact of the Company’s cash position being leveraged to reduce the private equity overhang.
|Avg. Revenue/Avg Enrollment Growth Sequential|
|Avg. Revenue/Avg Enrollment Growth YOY|
|Instructional Costs and Services||(62,822.00)||(120,089.00)||(187,399.00)||(259,138.00)||(290,911.80)||(310,730.54)||(324,586.16)||(336,183.26)||(347,201.95)|
|Marketing and Promotional||(81,036.00)||(145,721.00)||(211,550.00)||(267,354.00)||(348,354.11)||(366,570.88)||(377,180.38)||(390,643.53)||(403,440.95)|
|General and Administrative||(41,012.00)||(106,784.00)||(97,863.00)||(133,110.00)||(150,532.94)||(160,752.26)||(167,889.44)||(173,881.80)||(179,577.99)|
|Earnings before Taxes||33,502.0||82,240.0||217,779.0||276,515.0||233,961.7||259,442.6||278,315.2||289,571.5||300,350.8|
|Taxes and Other Expenses|
|Provision for Income Tax||(7,071.00)||(35,135.00)||(90,199.00)||(103,751.00)||(88,437.51)||(98,069.29)||(105,203.14)||(109,458.02)||(113,532.62)|
|Net Income (Loss)||26,431.0||47,105.0||127,580.0||172,764.0||145,524.1||161,373.3||173,112.1||180,113.5||186,818.2|
|Charges on Net Income|
|Dividends on Preferred Stock|
|Preferred Stock Adjustments|
|Net Income Available to Common Shareholders||26,431.0||47,105.0||127,580.0||172,764.0||145,524.1||161,373.3||173,112.1||180,113.5||186,818.2|
|Operating Income (Loss)||37.1%||32.1%||29.7%||28.6%||34.1%||33.6%||33.1%||33.1%||33.1%|
|Basic EPS - Continuing Operations||18.8%||23.5%||13.7%||14.3%||14.7%||14.7%||14.7%||14.7%||14.7%|
|Cash and Cash Equivalents||56,483.0||125,562.0||188,518.0||133,921.0||265,473.5||403,969.8||549,469.7||700,461.3||856,869.6|
|Deferred Income Taxes||2,734.0||4,027.0||7,039.0||5,429.0||-||-||-||-||-|
|Prepaid Expenses and Other Current Assets||7,061.0||9,581.0||12,650.0||17,199.0||18,417.7||19,421.5||20,071.0||20,761.9||21,429.9|
|Current Portion of Deferred Incomes Taxes||-||-||-||-||-||-||-||-||-|
|Total Current Assets||95,890.0||227,415.0||357,258.0||372,509.0||503,971.7||647,478.5||796,391.2||950,588.1||1,110,095.5|
|Non Current Assets|
|Property and Equipment, net||27,715.0||47,362.0||66,542.0||89,667.0||117,632.2||147,528.9||178,779.7||211,151.7||244,587.0|
|Deferred Income Taxes||2,366.0||13,491.0||15,845.0||11,200.0||11,200.0||11,200.0||11,200.0||11,200.0||11,200.0|
|Goodwill and Intangibles||1,897.0||3,201.0||4,123.0||7,037.0||10,558.0||14,079.0||17,600.0||21,121.0||24,642.0|
|Other Long-term Assets||1,378.0||3,762.0||7,457.0||13,716.0||8,729.6||9,257.3||9,621.3||9,952.5||10,272.7|
|Current Maturities of Notes Payable||-||-||-||-||-||-||-||-||-|
|Current Portion of Leases Payable||-||-||-||-||-||-||-||-||-|
|Deferred Revenue and Student Deposits||67,425.0||121,752.0||173,576.0||185,446.0||186,161.8||197,416.3||205,177.7||212,240.5||219,068.9|
|Other Current Liabilities||256.0||172.0||-||-||-||-||-||-||-|
|U.S. Governmental refundable loan funds||-||-||-||-||-||-||-||-||-|
|Income Taxes Payable||-||-||-||-||-||-||-||-||-|
|Total Current Liabilities||88,929.0||149,373.0||213,547.0||234,612.0||249,776.6||264,486.3||274,478.4||283,926.7||293,061.5|
|Non Current Liabilities|
|Note Payable Less Current Portion||-||-||-||-||-||-||-||-||-|
|Leases Payable, Less Current Maturities||-||-||-||-||-||-||-||-||-|
|Deferred Tax Liability||-||-||-||-||-||-||-||-||-|
|Preferred Stock Convertible||27,062.0||-||-||-||-||-||-||-||-|
|Other Long-term Liabilities||3,208.0||4,353.0||8,527.0||8,781.0||8,493.6||9,007.1||9,361.2||9,683.5||9,995.0|
|Common Stock - Par Value||33.0||543.0||558.0||590.0||590.0||590.0||590.0||590.0||590.0|
|Additional Paid in Capital||1,703.0||83,233.0||101,463.0||137,447.0||137,447.0||137,447.0||137,447.0||137,447.0||137,447.0|
|Accumulated Other Comprehensive Loss||-||-||-||(595.0)||(595.0)||(595.0)||(595.0)||(595.0)||(595.0)|
|Treasury Stock - Common||-||-||(42,193.0)||(134,971.0)||(134,971.0)||(134,971.0)||(134,971.0)||(134,971.0)||(134,971.0)|
|Total Shareholders Equity||6,109.0||134,609.0||238,241.0||353,648.0||499,172.1||660,545.4||833,657.5||1,013,770.9||1,200,589.2|
|Total Liabilities & Shareholders Equity||129,246.0||295,231.0||471,225.0||613,636.0||771,598.5||949,050.7||1,133,099.1||1,323,520.3||
|Depreciation and Amortization||2,452.00||5,890.00||8,565.00||12,743.00||13,912.34||14,852.65||15,509.93||16,062.62||16,588.39|
|Gain on Disposal of Fixed Assets||-||38.00||-||-||-||-||-||-||-|
|Stock based Compensation||1,827.00||35,943.00||7,939.00||10,595.00||-||-||-||-||-|
|Excess Tax Benefit of Option Exercises||-||(5,454.00)||(6,966.00)||(19,096.00)||-||-||-||-||-|
|Provision for Bad Debts||13,431.00||23,205.00||39,631.00||58,511.00||-||-||-||-||-|
|Stockholder Settlement (non-cash Portion)||-||10,577.00||-||-||-||-||-||-||-|
|Deferred Income Taxes||(5,658.00)||(12,418.00)||(5,366.00)||6,606.00||5,429.00||-||-||-||-|
|Other Long-term Assets||(471.00)||(2,384.00)||(3,695.00)||(7,694.00)||4,986.43||(527.75)||(363.95)||(331.19)||(320.20)|
|Amortization of Premiums &discounts||-||(66.00)||663.00||3,969.00||-||-||-||-||-|
|Accounts Payable and Accrued Liabilities||11,525.00||10,906.00||18,530.00||27,509.00||14,448.81||3,455.15||2,230.74||2,385.54||2,306.37|
|Uncertain Tax Positions||2,394.00||1,152.00||4,612.00||-||-||-||-||-||-|
|Deferred Revenue and Student Deposits||50,608.00||54,327.00||51,824.00||11,870.00||715.82||11,254.52||7,761.32||7,062.84||6,828.43|
|U.S. Governmental refundable loan funds||(221.00)||-||-||-||-||-||-||-||-|
|Prepaid Expense and Other Assets||(6,306.00)||(2,520.00)||(2,665.00)||(2,047.00)||(1,218.71)||(1,003.78)||(649.56)||(690.91)||(667.98)|
|Loss on Disposals of Fixed Assets||-||-||73.00||13.00||-||-||-||-||-|
|Cash Flow from Operating Activities||70,748.00||131,727.00||189,949.00||220,808.00||176,951.06||186,766.59||195,781.69||202,947.20||209,952.99|
|Purchase of Marketable Securities||-||(44,922.00)||(111,690.00)||(337,084.00)||-||-||-||-||-|
|Capitalized Course Development Costs||-||-||(1,214.00)||(3,521.00)||(3,521.00)||(3,521.00)||(3,521.00)||(3,521.00)||(3,521.00)|
|Maturities of Marketable Securities||-||-||45,000.00||167,049.00||-||-||-||-||-|
|Cash Flow from Investing Activities||(16,550.00)||(70,030.00)||(94,472.00)||(208,048.00)||(45,398.57)||(48,270.30)||(50,281.72)||(51,955.65)||(53,544.67)|
|Excess Tax Benefit of Option Exercises||-||5,454.00||6,966.00||19,096.00||-||-||-||-||-|
|Proceeds from Note Payable||-||-||-||-||-||-||-||-||-|
|(Payments On) Notes Payable||(4,891.00)||(234.00)||-||-||-||-||-||-||-|
|Net Borrowings/payments on Line of Credit||-||-||-||-||-||-||-||-||-|
|Payment of Capital Lease Obligations||(175.00)||(197.00)||(634.00)||-||-||-||-||-||-|
|Proceeds from the Issuance of Common Stock||-||28,104.00||-||1,330.00||-||-||-||-||-|
|Proceeds from Exercise of Stock Options||-||344.00||1,040.00||4,889.00||-||-||-||-||-|
|Proceeds from Issuance of Stock Under Employee Stock Purchase Plan||-||616.00||1,107.00||-||-||-||-||-||-|
|Proceeds from Exercise of Warrants||-||1,002.00||1,193.00||106.00||-||-||-||-||-|
|Payments on Conversion of Preferred Stock||-||(27,707.00)||-||-||-||-||-||-||-|
|Issuance of Common Stock Under Employee Stock Purchase Plan||-||-||-||-||-||-||-||-||-|
|Repurchase of Common Stock||-||-||(42,193.00)||(92,778.00)||-||-||-||-||-|
|Costs Incurred in Connection with the Ipo||-||-||-||-||-||-||-||-||-|
|Cash Flow from Financing Activities||(5,066.00)||7,382.00||(32,521.00)||(67,357.00)||-||-||-||-||-|
|Cash Flow Net Changes in Cash|
|EOP Cash Flow|
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