BRIDGEPOINT EDUCATION INC BPI
April 19, 2012 - 4:19pm EST by
MSG257
2012 2013
Price: 21.40 EPS $3.02 $2.58
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 $M): 0 EBIT 274 232
TEV ($): 829 TEV/EBIT 0.0x 0.0x

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  • For Profit Education
 

Description

 

Recommendation

 

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.  

http://dl.dropbox.com/u/659242/Bridge%20Point%20Education%20%28BPI%29%20Recommendation%20Final%204-17-12%20Final.doc

http://dl.dropbox.com/u/659242/BPI.xlsx

 

Investment Highlights

 

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: 

  • 87% of alumni agree that earning their degree from Ashford gave them confidence to pursue new job opportunities.
  • 92% of graduates indicated they were satisfied or very satisfied with their Ashford experience.
  • 91% of alumni agree that earning their Ashford degree was worth the time commitment required.
  • Out of the 89% of alumni that previously attended a traditional institution, 92% feel the quality of education at Ashford is the same or higher than a traditional university.
  • 95% of alumni said they would recommend Ashford to others.
  • The Parthenon Group, as part of its 2011 private sector higher education graduate survey, compared Ashford University’s net promoter score to a group of nine other private sector schools and Ashford scored 75% versus an average of 52% for the nine school group.

 

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:

 

  • Low Tuition Price Point Results in a Favorable Student Proposition and Limits Regulatory Risk:  Ashford University’s tuition is ~26% less expensive than comparable publicly traded online schools and only ~6% higher than the tuition for online programs at state universities (for in-state residents). The low price point benefits Bridgepoint’s students as tuition is mostly covered by federal financial aid (Title IV), leaving only a minimal need (<1%) for private loans.  Survey data suggests affordability is the primary reason for students selecting Ashford. In addition to providing a point of differentiation vs. for profit competitors, BPI’s lower tuition better positions the Company against some of the recent regulatory changes (e.g. gainful employment) discussed below. 
  • High Transfer Credit Option Provides an Additional Underserved Bachelor’s Completion Market Opportunity. Ashford University is one of only six institutions in the country, and the only for-profit, accredited to accept up to 99 transfer credits (out of 120) for a bachelor’s degree program. Approximately 18% of AU’s students transfer in more than 70 credits. As most of the company’s peers accept only up to 65-70 transfer credits, Bridgepoint benefits from access to this underserved student segment.  Transferability also has the important effect reducing the overall cost of a degree program for a student.

 

  • Accessible Educational Model: Ashford University provides weekly start dates, and offers classes that last up to five weeks, which remains lower than many of the other online school programs available. We note that American Public University’s accelerated courses last eight weeks, as a comparison. We believe this flexibility is a competitive advantage vs. other institutions and better positions BPI with certain demographics. 

 

  • Traditional Campuses provide heritage/culture/branding edge to online programs: Although only ~2% of BPE students attend classes on ground, we believe BPE’s on ground campuses and related resources boost its schools’ credibility with prospective students, improve students’ feelings of connection with their university, and enhance students’ in-school experiences.  

 

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. 

Investment Risks

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).

 

  • Title IV and Cohort Default Rates: As of the year-end December 31, 2011, Ashford University derived 86.8% of its revenues and University of the Rockies derived 85% of its revenues from Title IV funds. Management is confident that it can continue to manage this metric going forward. Ashford University’s two-year cohort default rate (CDR) for 2009 was 15.3%, and the just released draft two-year CDR for 2010 was 10.4%. For the University of the Rockies, the two-year CDR for 2009 was 3.3% and the 2010 draft CDR was 3.9%. Earlier this week, the company received draft three-year CDRs, which were 20.2% for Ashford and 3.3% for the University of the Rockies. Management expects these rates to trend lower in the future as the company continues to invest in attracting and retaining better-performing students.  Regarding Gainful Employment, BPI has 45% repayment rate versus the DoE’s 35% GE threshold.  We would expect these metrics to improve as the Company benefits from the operational changes mentioned above (which we believe went above what the Company needed to do to remain compliant) and an improving economy

 

  • 90/10 rule: Under the 90/10 rule, a postsecondary institution can receive no more than 90% of its revenues from Federal sources, specifically loans or Pell grants under the Title IV program. Currently, federal military tuition assistance and Veterans benefits, do not count toward the "90", but are considered tuition reimbursement similar to standard corporate programs. Recent speculation that the Obama Administration is considering incorporating military funds into the 90/10 calculation and perhaps reducing the cut-off to 85% from 90% has refocused investor attention on this issue. In particular, speculation has focused on whether the President might implement this change via an Executive Order as a way to bypass Congressional (Republican) opposition. We do not believe a change in 90/10 is imminent. Several observations drive this conclusion: 1) This is not a key issue for the President, so it is unclear why he would risk political capital to push through a change. 2) Republicans could spin the incorporation of military benefits into 90/10 as "anti-military" and unfriendly to enlisted personnel, putting Democrats on the defensive in an election year. 3) From a practical standpoint, reducing the cut-off to 85% could theoretically eliminate APEI, APOL, BPI, CECO, COCO, and LOPE from the Title IV program, sharply reducing access to higher education in the US, also a politically unpopular outcome.  However, this is an area of greater risk for Ashford relative to the sector as it generates 87% of its revenue from Title IV sources and potentially an incremental 5% from military sources.
  • Pell Exposure High Relative to Other Online Providers: Bridgepoint has significantly more exposure to lower income students than the other predominately online For Profit providers, which makes their students more risky (as shown by past government studies). Oddly, based on Bridgepoint’s data, BPI’s students who receive Pell grants persist at higher rates than non-Pell students. In academic year 2010-2011, 93% of BPI’s average enrollment for the year received a Pell grant. We believe the high Pell Grant exposure may be reflective of a lower quality student base and additionally, exposes the Company to potential cuts funding for Pell Grants.  

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): 

  • Ashford’s track record with HLC is fairly solid. We believe HLC (more than any other accreditor) is under immense pressure to scrutinize institutions that run afoul of the rules. Given this pressure we would expect Bridgepoint/Ashford to be one of the most scrutinized institutions accredited by HLC. However, Ashford was given a seven-year accreditation term in 2008, and available disclosures suggest that commission continues to view the institution as a solid member.
  • Its also our understanding that Bridgepoint will likely be able to secure WASC accreditation based on its institutional structures, academics (course catalog, outcome tracking, etc.), technologies, and good standing with HLC. Further, we believe the HLC and WASC are not that different in their views on academics, and institutional improvement processes.
  • Additionally, BPI has made substantial investments in technology, learning outcomes, marketing, and improving class sizes as areas for investment.  The Company also hired Vicki Schray, a 13-year veteran of the DoE with particularly relevant experience in the Office of Postsecondary Education. We believe these investments should help the company better navigate the risks associated with accreditation.

 

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.

 

Financial statements: 

Income Statement                  
                   
Revenues 2008 2009 2010 2011 2012 2013 2014 2015 2016
  Revenues  218,290.00  454,324.00  713,233.00  933,349.00  1,021,404.14  1,091,446.35  1,140,505.39  1,181,332.81  1,220,089.41
                   
BOP Enrollments    31,558.0  53,688.0  77,892.0  86,642.0  91,742.0  94,915.5  97,189.2  99,049.0
New Enrollments    61,590.0  82,350.0  82,100.0  81,320.8  82,540.6  83,778.7  85,035.3  86,310.9
Churn    39,460.0  58,146.0  73,350.0  76,220.7  79,367.1  81,505.0  83,175.5  84,635.0
EOP Enrollments    53,688.0  77,892.0  86,642.0  91,742.0  94,915.5  97,189.2  99,049.0  100,724.8
                   
Revenue/Enrollment                  
Revenue/Avg. Enrollment                  
Avg. Revenue/Avg Enrollment Growth Sequential                  
Avg. Revenue/Avg Enrollment Growth YOY                  
                   
Expenses                  
  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)
  Interest Expense  -    -    -    -    -    -    -    -    -  
  Interest Income  -    -    -    -    2,356.37  6,049.91  7,465.78  8,947.28  10,482.31
  Other Income/expense-net  82.00  510.00  1,358.00  2,768.00  -    -    -    -    -  
   (184,788.0)   (372,084.0)   (495,454.0)   (656,834.0)   (787,442.5)   (832,003.8)   (862,190.2)   (891,761.3)   (919,738.6) 
                   
  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
                   
EBIT  33,420.00  81,730.00  216,421.00  273,747.00  231,605.28  253,392.66  270,849.42  280,624.21  289,868.52
EBITDA  35,872.00  87,620.00  224,986.00  286,490.00  245,517.62  268,245.31  286,359.35  296,686.83  306,456.91
                   
Supplementary Info 28.8% 26.4% 26.3% 27.8% 28.5% 28.5% 28.5% 28.5% 28.5%
  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%
Balance Sheet                  
  2008 2009 2010 2011 2012 2013 2014 2015 2016
Current Assets                  
  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
  Marketable Securities  -    44,988.0  90,611.0  153,779.0  153,779.0  153,779.0  153,779.0  153,779.0  153,779.0
  Accounts Receivables  28,946.0  43,232.0  58,415.0  62,156.0  66,276.5  70,283.2  73,046.4  75,560.9  77,991.9
  Loans Receivable  -    -    -    -    -    -    -    -    -  
  Inventories  -    -    -    -    -    -    -    -    -  
  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
  Restricted Cash  666.0  25.0  25.0  25.0  25.0  25.0  25.0  25.0  25.0
  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
Marketable Securities  -    -    20,000.0  119,507.0  119,507.0  119,507.0  119,507.0  119,507.0  119,507.0
  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  -    -    -    -    -    -    -    -    -  
  Intangibles  -    -    -    -    -    -    -    -    -  
  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
  Total Assets  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  1,520,304.1
                   
Current Liabilities                  
  Accounts Payable  4,705.0  2,870.0  5,076.0  8,961.0  8,361.7  8,805.5  9,087.6  9,400.4  9,702.8
  Accrued Liabilities  16,543.0  24,579.0  34,895.0  40,205.0  55,253.1  58,264.5  60,213.1  62,285.8  64,289.8
  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 Liabilities  -    -    -    -    -    -    -    -    -  
  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  -    -    -    -    -    -    -    -  
  Rents Liability  3,938.0  6,896.0  10,910.0  16,595.0  14,156.1  15,011.9  15,602.1  16,139.1  16,658.4
  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
                   
Total Liabilities  -    -    232,984.0  259,988.0  272,426.3  288,505.3  299,441.6  309,749.3  319,714.9
                   
Shareholders' Equity                  
  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
  Retained Earnings  4,373.0  50,833.0  178,413.0  351,177.0  496,701.1  658,074.4  831,186.5  1,011,299.9  1,198,118.2
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
 1,520,304.1
 
 
Cash Flow                  
                   
  2008 2009 2010 2011 2012 2013 2014 2015 2016
Operating Activities                  
  Net Income  26,431.00  47,105.00  127,580.00  172,764.00  145,524.15  161,373.28  173,112.05  180,113.47  186,818.22
  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 Receivable  (27,747.00)  (37,491.00)  (54,814.00)  (60,817.00)  (4,120.47)  (4,006.78)  (2,763.15)  (2,514.48)  (2,431.03)
  Loan Receivable  277.00  -    -    -    -    -    -    -    -  
  Inventories  -    -    -    -    -    -    -    -    -  
  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
  Accounts Payable  -    -    -    -    -    -    -    -    -  
  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
  Other Liabilities  2,206.00  2,917.00  4,038.00  5,882.00  (2,726.31)  1,369.30  944.29  859.31  830.79
  U.S. Governmental refundable loan funds  (221.00)  -    -    -    -    -    -    -    -  
  Accrued Liabilities  -    -    -    -    -    -    -    -    -  
  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
                   
Investing Activities                  
  Capital Expenditures  (15,884.00)  (24,249.00)  (26,568.00)  (34,492.00)  (41,877.57)  (44,749.30)  (46,760.72)  (48,434.65)  (50,023.67)
  Business Acquisitions  -    (1,500.00)  -    -    -    -    -    -    -  
  Purchase of Marketable Securities  -    (44,922.00)  (111,690.00)  (337,084.00)  -    -    -    -    -  
  Restricted Cash  (666.00)  641.00  -    -    -    -    -    -    -  
  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)
                   
Financing Activities                  
  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)  -    -    -    -    -  
                   
                   
BOP Cash                  
  Cash Flow Net Changes in Cash                  
EOP Cash Flow                  

Catalyst

 
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    Description

     

    Recommendation

     

    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.  

    http://dl.dropbox.com/u/659242/Bridge%20Point%20Education%20%28BPI%29%20Recommendation%20Final%204-17-12%20Final.doc

    http://dl.dropbox.com/u/659242/BPI.xlsx

     

    Investment Highlights

     

    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. 

    Investment Risks

    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.

     

    Financial statements: 

    Income Statement                  
                       
    Revenues 2008 2009 2010 2011 2012 2013 2014 2015 2016
      Revenues  218,290.00  454,324.00  713,233.00  933,349.00  1,021,404.14  1,091,446.35  1,140,505.39  1,181,332.81  1,220,089.41
                       
    BOP Enrollments    31,558.0  53,688.0  77,892.0  86,642.0  91,742.0  94,915.5  97,189.2  99,049.0
    New Enrollments    61,590.0  82,350.0  82,100.0  81,320.8  82,540.6  83,778.7  85,035.3  86,310.9
    Churn    39,460.0  58,146.0  73,350.0  76,220.7  79,367.1  81,505.0  83,175.5  84,635.0
    EOP Enrollments    53,688.0  77,892.0  86,642.0  91,742.0  94,915.5  97,189.2  99,049.0  100,724.8
                       
    Revenue/Enrollment                  
    Revenue/Avg. Enrollment                  
    Avg. Revenue/Avg Enrollment Growth Sequential                  
    Avg. Revenue/Avg Enrollment Growth YOY                  
                       
    Expenses                  
      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)
      Interest Expense  -    -    -    -    -    -    -    -    -  
      Interest Income  -    -    -    -    2,356.37  6,049.91  7,465.78  8,947.28  10,482.31
      Other Income/expense-net  82.00  510.00  1,358.00  2,768.00  -    -    -    -    -  
       (184,788.0)   (372,084.0)   (495,454.0)   (656,834.0)   (787,442.5)   (832,003.8)   (862,190.2)   (891,761.3)   (919,738.6) 
                       
      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
                       
    EBIT  33,420.00  81,730.00  216,421.00  273,747.00  231,605.28  253,392.66  270,849.42  280,624.21  289,868.52
    EBITDA  35,872.00  87,620.00  224,986.00  286,490.00  245,517.62  268,245.31  286,359.35  296,686.83  306,456.91
                       
    Supplementary Info 28.8% 26.4% 26.3% 27.8% 28.5% 28.5% 28.5% 28.5% 28.5%
      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%
    Balance Sheet                  
      2008 2009 2010 2011 2012 2013 2014 2015 2016
    Current Assets                  
      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
      Marketable Securities  -    44,988.0  90,611.0  153,779.0  153,779.0  153,779.0  153,779.0  153,779.0  153,779.0
      Accounts Receivables  28,946.0  43,232.0  58,415.0  62,156.0  66,276.5  70,283.2  73,046.4  75,560.9  77,991.9
      Loans Receivable  -    -    -    -    -    -    -    -    -  
      Inventories  -    -    -    -    -    -    -    -    -  
      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
      Restricted Cash  666.0  25.0  25.0  25.0  25.0  25.0  25.0  25.0  25.0
      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
    Marketable Securities  -    -    20,000.0  119,507.0  119,507.0  119,507.0  119,507.0  119,507.0  119,507.0
      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  -    -    -    -    -    -    -    -    -  
      Intangibles  -    -    -    -    -    -    -    -    -  
      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
      Total Assets  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  1,520,304.1
                       
    Current Liabilities                  
      Accounts Payable  4,705.0  2,870.0  5,076.0  8,961.0  8,361.7  8,805.5  9,087.6  9,400.4  9,702.8
      Accrued Liabilities  16,543.0  24,579.0  34,895.0  40,205.0  55,253.1  58,264.5  60,213.1  62,285.8  64,289.8
      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 Liabilities  -    -    -    -    -    -    -    -    -  
      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  -    -    -    -    -    -    -    -  
      Rents Liability  3,938.0  6,896.0  10,910.0  16,595.0  14,156.1  15,011.9  15,602.1  16,139.1  16,658.4
      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
                       
    Total Liabilities  -    -    232,984.0  259,988.0  272,426.3  288,505.3  299,441.6  309,749.3  319,714.9
                       
    Shareholders' Equity                  
      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
      Retained Earnings  4,373.0  50,833.0  178,413.0  351,177.0  496,701.1  658,074.4  831,186.5  1,011,299.9  1,198,118.2
    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
     1,520,304.1
     
     
    Cash Flow                  
                       
      2008 2009 2010 2011 2012 2013 2014 2015 2016
    Operating Activities                  
      Net Income  26,431.00  47,105.00  127,580.00  172,764.00  145,524.15  161,373.28  173,112.05  180,113.47  186,818.22
      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 Receivable  (27,747.00)  (37,491.00)  (54,814.00)  (60,817.00)  (4,120.47)  (4,006.78)  (2,763.15)  (2,514.48)  (2,431.03)
      Loan Receivable  277.00  -    -    -    -    -    -    -    -  
      Inventories  -    -    -    -    -    -    -    -    -  
      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
      Accounts Payable  -    -    -    -    -    -    -    -    -  
      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
      Other Liabilities  2,206.00  2,917.00  4,038.00  5,882.00  (2,726.31)  1,369.30  944.29  859.31  830.79
      U.S. Governmental refundable loan funds  (221.00)  -    -    -    -    -    -    -    -  
      Accrued Liabilities  -    -    -    -    -    -    -    -    -  
      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
                       
    Investing Activities                  
      Capital Expenditures  (15,884.00)  (24,249.00)  (26,568.00)  (34,492.00)  (41,877.57)  (44,749.30)  (46,760.72)  (48,434.65)  (50,023.67)
      Business Acquisitions  -    (1,500.00)  -    -    -    -    -    -    -  
      Purchase of Marketable Securities  -    (44,922.00)  (111,690.00)  (337,084.00)  -    -    -    -    -  
      Restricted Cash  (666.00)  641.00  -    -    -    -    -    -    -  
      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)
                       
    Financing Activities                  
      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)  -    -    -    -    -  
                       
                       
    BOP Cash                  
      Cash Flow Net Changes in Cash                  
    EOP Cash Flow                  

    Catalyst

     

    Messages


    SubjectRE: Questions
    Entry05/02/2012 06:16 PM
    MemberMSG257
    MJW248
     
    MJ thanks for the questions.
     
    1)  As noted in our write-up BPI is exposed (and probably slightly more so) to the same issues regarding the 90/10 rule as the majority of the industry.  So yes this is a risk factor for the company.  However, we generally do not view this as a significant risk factor as most industry participants have generally been managing at the 85% - 90% level without any major issues (essentially you can manage against this through student selection and pricing).  As briefly discussed in our write-up there is the risk that legislators may reduce the threshold or include military funds as part of the 90% calculation (don't remember exactly but Maxine Waters may have proposed something on this front), however; we believe most of these proposal are unlikely to pass as they are very low legislative priorities and would be spun as anti-military.  While a reduction in the 90% threshold or an inclusion of military benefits in the 90/10 calculation would have an adverse effect on BPI and the broader sector's economics we believe operators can effectively mute part of the effect through pricing, student selection, and supplementing Title IV funds with private loans. 
     
    2)  A couple of factors 1)  BPI categorizes all of its IT spend in G&A so its G&A looks overstated vs. competitors and its instructional costs looks undestated.  We estimate this would increase BPI's instructural cost per student by ~15% or ~$3700.  However, this likely does not account for most of the difference 2)  We believe the primary difference is driven by the fact that BPI has an online devlivery model vs. traditional schools like Appolo and that BPI is has invested extensively in using technology to drive student outcomes (Programs like Constellation and Waypoint).  We estimate Appolo spends ~$4,300 per student vs. ~3,700 for BPI (this is adjusted for IT).  For cotnext APEI (another predominantly online provider) spends only ~$1,000 per student.  3)  Likely less of a factor but scale is probably another factor (and probably more so for the online providers) that helps drive lower instructional costs per student.  For context Appollo spends $4,400/student vs. $4500 for CPLA, $5000 for STRA despite Apollo having a student fo faculty ratio of 11 vs. 23 and 20 for CPLA and STRA (BPI is at 22). 
     
    3)  We tend to be a little less focused on management sales in our diligence process.  However, most of the shares being sold appear (we have not confirmed with management) to relate to options that where issued when Warburg initially set up the Company.   From what we understand these shares are effectively being purchase at $0.3 - $0.5 share and being sold in the $20s.  May/may not be rationale, but if I am management team member I would be selling to under that dynamic. 

    SubjectWASC
    Entry07/09/2012 09:08 AM
    MemberToby24
    Any thoughts on the announcement?

    SubjectRE: WASC
    Entry07/10/2012 07:36 AM
    MemberMSG257
    Toby,
     
    Sorry for the delayed response, still trying to figure out the implications of the WASC action.  The short answer is that this puts the stock in the "to hard bucket."  While we had viewed a failure to recieve accreditation as a low probability outcome, we viewed the WASC accreditation process as the most substantial risk given the implications for the value of the business as a school is ineglible for TITLE IV funding without accreditation.
     
    The WASC citied the following areas of non-compliance for BPI  (You can download the WASC team report and action letter at the WASC website):
     
    • Attrition and support for student achievement
    • Adequacy and alignment of resources with educational repsonses
    • Adequacy of faculty model and role of faculty
    • Effectiveness of program review
    • Assessing student learning and program rigor
    • Independence of the Ashford governing board
    • After reading the WAC action letter it appears the a number of the issues cited
     
    While there are a number of actions management could take to remedy the above issues.  Addressing the collective set of issues appears to be a substantial challenge, particularly the issues around attrition.  Addressing many of these issues will also negatively affect the earnings power of the business (addressing attribution will likely mean slower growth or a contrction in the student body, and many of the resource related issues imply substantial incremental investments).  Additionally, the WASC repeatedly highlights that Ashford had made efforts to address the areas citied above, but the impact of the pilots could not yet be measured.  This suggests that even if they are able to address the issues it will still be unclear whether there has been sufficient time (or will the commission believe there has been sufficient time) for those initiatives to have a measurable impact.  Lastly, even if they get accredited by the WASC they would still need the DOE to approve the change in accreditor.  The DOE apporval process could take years and we would assume not to be a certainty given the recent WASC action.
     
    On the positive side they maybe able to to retain HLC accreditation (through the 2014/2015) calander year if they can move a substanital amount of the infrastruture to Iowa.  This would give them more time to address whatever accreditation deficiencies they had with the HLC and give them another few years of cash flow.  For context the company had ~$7 - $8/share in cash and our projections had them generating an additional $7.5 of un-discounted cash flow generated during this period (our model probably isn't valid in an enviornment where the accreditation status will likely go away).   So one could argue that your getting a cheap call option on their ability to be accredited.
     
    One other note is that I think this is indicative of a higher level of risk for the industry as a whole as every company in the space will need to be reaccredited at some point in the future.  While BPI's specific issues, the challenges of managing an online model, and BPI's growth likely created unique challenges for BPI, we believe BPI likely faced a higher threshold than traditional/not for profits.
     
     
     
     
     
     

    Subjectresidual value if they lose accreditation?
    Entry05/16/2013 04:24 PM
    Memberjoe661
    Any thoughts on what might happen if BPI loses accreditation?  I.e., do you think they can actually hold onto the cash, or at least some of it?  I dont know of any precedent for a school of this size losing accreditation, but I imagine it would not be a neat and orderly wind-down.  You'd think they could face lawsuits from students, might have closure costs, payouts to faculty, and maybe the Feds even get involved to try to get some of their money back.

    SubjectRE: residual value if they lose accreditation?
    Entry05/16/2013 05:06 PM
    Memberconway968
    Before Ashford lost accreditation, it would probably first have to be put on show-cause at the Feb 2014 HLC meeting (unclear why this would happen, but indulging the hypothetical).  It would then probably have a year to show why it should not lose its accredidation.  When it became apparent that HLC was going to withdraw accreditation, Ashford would have to decide whether to litigate or negotiate a teach out.  If it chooses to litigate, it would present an interesting budgetary problem for HLC because HLC's entire annual budget is $8mm (financials are publicly available) and litigation costs would be a significant burden.  If it chooses a teach out, it would be allowed to teach courses on a normal basis (with accreditation, accepting financial aid, etc.) for another 6-12 months and would work with an HLC-approved primary partner (probably another online school) to transfer all students wishing to continue their studies.
     
    That answer is based on what usually happens.  There is much discretion involved, so things could play out differently.  The shared goall is to minimize the disruption for students.  I don't see student lawsuits or payouts to faculty, but I agree that there would be lease breakage and other shutdown expenses.  I would guess those would be in the tens of millions, and could conceivably top 100mm.  
     
    For recent examples, google Chancellor U, Mountain State U, and Kean U.

    SubjectWASC Accreditation Approved
    Entry07/11/2013 07:32 AM
    Memberjoe661
    Operating results are still declining, but that's was not the issue with this trading barely above cash.  This was really interesting example of a stock with a clear binary outcome.  Anyone think they'll be inclined to pay out some of the cash now that the future is a lot less murky?

    SubjectRE: WASC Accreditation Approved
    Entry07/11/2013 07:43 AM
    Memberconway968
    I suspect that a material chunk of cash will be distributed over the coming months via dividends, tenders, buybacks, etc.  The company understands it is overcapitalized and the choice not to pay out cash during this period of uncertainty was deliberate and temporary. 
     
    As for operations, I would hope to see indicators of improvement relatively soon, as I believe the school's offering is well-positioned competitively in terms of price point, transfer credit policy, and student perception.  It has more in common with LOPE than with APOL or Devry U.  
     
    As with all of these companies, the high operating leverage will continue to cause a good amount of earnings deterioration in the meantime.  The 85mm of cost reductions announced yesterday should help in that regard. 

    SubjectTender offer
    Entry11/14/2013 12:50 AM
    Memberjoe661
    This has got to be disappointing compared to the amount of value they could have created.  Not too long ago the stock was trading at cash; now $19.50 seems pretty fully valued to me.

    SubjectPretty Awful
    Entry03/11/2014 05:45 PM
    Memberjoe661
    So, they had the chance to buy back stock at below cash value, but instead chose to wait for the stock to double so that they could have "more certanity" before doing anything with the cash hoard.  And then they spend $200mm on the tender at $19.60, out of an original ~$550mm in cash.  But at least the sharecount went down a lot right?  Wrong!  The share count is down by less then 2mm, despite the fact they bought back  10.25mm shares.  
     
    And the stock has promptly fallen 20% from the tender price, which is a loss of about $37mm based on market prices, but possibly hundreds of millions of dollars when you compare to the value that they could have created by buying back stock at less than cash value.
     
    I guess there was no alternative though.  How can you buy back stock unless you have very good certainty about all aspects of the business.  If anyone saw Grant's this week, he talks about this very phenomenon (companies don't buy back stock when the future is uncertain and the stock is cheap, but wait until the future is certain and the stock is expensive); he could have used BPI as a case study.

    SubjectRE: Pretty Awful
    Entry03/11/2014 08:10 PM
    Memberconway968
    Your point is not correct.  I agree that the company should have bought stock when in distress-- they claim that legal would not allow it-- but do not agree that the $19.60 tender price is problematic in relation to today's lower trading price.
     
    Because practically every holder participates in an above-market tender, the  actual price of the tender does not matter-- if anything, a higher tender price is better because participating holders benefit at the expense of zombie accounts that fail to participate.  You should think of an above-market tender as more akin to a special dividend than to an open market repurchase.  I have not verified your math on the sharecount, but I see no reason to believe that the tender did not shrink the diluted shares by 10.25mm.  The difference you are observing may be coming for the exercise of deep-in-the-money employee stock options in order to participate in the tender.  Those should have been accounted for in your pre-tender diluted shares.  BPI has always had a lot of dilution from employee options, as the management team received large stock option grants at inception (and generous comp since). 

    SubjectRe: Re: Anyone still follow?
    Entry11/06/2014 11:42 AM
    Memberconway968

    I agree that the valuation is interesting and that there are signs that starts have bottomed, but would not expect the stock to immediatly rocket on a buyback.  This sector is very out of favor and the BPI management team is unpopular.  Will probably be a grind upward as results improve, possibly aided by share repurchase.  

     

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