Description

If you like the idea of a counter cyclical small cap stock with enormous operating leverage, Lincoln Tech (LINC) may be for you.  In fact, according to the company, if the company sees similar numbers as 2010, LINC would be generating over $80 million in EBITDA resulting in an EV/EBITDA multiple of just 1.5 !

Business Description

Lincoln Educational Services Corporation (LINC) and its subsidiaries provide diversified career-oriented post-secondary education to recent high school graduates and working adults.  LINC currently operates 22 schools in 14 states, offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electronic systems technology, among other programs), healthcare services (which include nursing, dental assistant and medical administrative assistant, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and information technology.  The schools operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names.  Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study.  Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. LINC's other campuses primarily attract students from their local communities and surrounding areas.  All of the campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (the “DOE”) and applicable state education agencies and accrediting commissions which allow students to apply for and access federal student loans as well as other forms of financial aid.

LINC has been in existence for 75 years.  It focuses on two primary segments in middle skills training:  1) Transportation and Skilled Trades, and 2) Heathcare.

LINC has been really struggling over the past few years with a bloated cost structure, poor course programs, and industry pressures from the strong economy.  Starting in late 2018 and 2019, the company has been able to turn around enrollment trends as well as refinance its debt which has allowed it greater flexibility and resources to grow.

Primary Business Segments

Transportation and Skilled Trades-  This segment includes 13 campuses and approximately 7,300 students as of last year.  Students in these schools learn Automotive, Diesel, HVAC, CNC, Welding and Electrical skills.  Students are provided training to position them to gain entry level jobs as auto and diesel mechanics.  Tuition can run anywhere from 5-40k and can last a few months to 2 years.   Classes involve hands on instruction, however due to Covid, remote learning has been primarily utilized.  LINC also trains students to become electricians, welders AC and HVAC professionals.  These students are usually hired by repair or construction firms.  This segment represents about 2/3 of LINC's students and has been growing about 3-4% over the past year.  

Healthcare-  In this segment LINC primarily provides training for jobs in the healthcare field such as nurses, dental assistants, medical assistants, and heath insurance claims examiner.  These students can get hired by hospitals, doctors offices, medical labs and health insurance companies.  There are 9 campuses covering approximately 4,000 students as of last year.  Demand has been strong in this segment particularly for nurse practicioners.  Growth has been about 9% over the last year or two.

Middle Skills Jobs - What are they?  What is the current situation in the U.S with this category?

Middle Skills Jobs are jobs that don't require a 4 year college degree, however need real training and learning that can take 6 months - 2 years.  Approximately half of the job openings in the US are these middle-skills positions, and it has been increasing.  The demand to fill these positions in the US, has been exceeding supply.  There are a couple reasons behind this.  1) There has been such a push that everyone get a 4 year college degree (and go into debt) that going into a trade after high school is losing appeal. 2)  Baby boomers retiring from the skilled trade positions 3) Decline in HS programs covering technical training, 4) Growing number of positions in Healthcare and transportation and construction jobs.

What happens to Skilled Jobs when the economy falters?

Historically enrollments have accelerated during recessions.  The reason behind this is simple.  That is where the jobs are.  Corporate America will be cutting workforce in middle management and in office jobs.  During Covid, there has been additional demand and interest in pursuing healthcare related positions.  

During the last recession in 2010, LINC had 6,000 more students at its 22 locations than it does today...Utilization in 2010 was 65% vs. just 40% today.  Revenues were $414mm vs. just $275 million in 2019.  Most importantly EBITDA was $80 million vs. just $13mm in 2019!  

Financial Forecast

The assumptions for this model assume revenues essentially stop growing in 2020 after growing 5% in 2018 and 6.2% in 2019.  However, in 2021 revenues continue to grow back to +6% while the cost structure stays in tact.  The cost structure will be dependend on the opportunity.  If growth is higher than 6%, there may be additional costs and operating leverage might not be as high.  

Inorganic Growth

There may be an opportunity to accelerate growth faster by making an acquisition of another middle-skills training company.  It is a fragmented industry.  The company currently has about $30 million in total liquidity including about $10mm in cash and $20 million in its credit facility.

Valuation

The current market cap is approximately $100 million and has net debt of $9mm and a convertible preferred of $12.7 million.  The current EV is about $125mm.  If LINC hits its numbers in the model of $28mm in EBITDA next year, I believe it should trade at about 8x next years EBITDA for an EV of $225.  The valuation at 8X 2021 EBITDA would be about $8/share.  or $7/share on an as-converted basis for the preferred (the preferred converts into 5mm shares.)  

The crazy valuation occurs if LINC hits its 2010 operating metrics and hits $80mm in EBITDA.  

The company also has $66 million of tax loss carryforwards.

The CARES Act Debt

LINC recently received $27.4 million in funding from the CARES Act.  The majority of the grant will go to students to offset their additional expenses related to the disruption of school operations including eligible expenses under a student’s cost of attendance, such as food, housing, course materials, technology, health care and childcare.  Also, a portion of the funds are expected to be used to offset costs associated with significant changes to the delivery of instruction as a result of the COVID-19 pandemic.

Catalyst

Continued enrollment trend from the past few years.  Accretive acquisition.