Grand Canyon Education: Investors Remain Unconvinced Despite Strong Expected Growth

Intro

We wrote about Grand Canyon Education, Inc. (NASDAQ:LOPE) back in February of this year post the company's fourth-quarter earnings when we stated that shares most likely would consolidate for some time before the next leg up could begin in earnest. Shares are actually down over 8% since our February commentary whereas the S&P has rallied just over 7% over the same time frame. Given the absence of a paying dividend in LOPE, this is a sizable opportunity cost over the past 3+ months alone.

The reasoning behind our premise at the time was Grand Canyon's company's expected growth curve where 7% bottom-line earnings growth was earmarked by consensus at the time for fiscal 2023. We believed this projection needed to start trending higher in order to fully account for the valuation LOPE was trading at back in February. Suffice it to say, although the company's recently announced Q1 numbers (and updated guidance) once more demonstrated excellent profitability and improved forward-looking growth projections, we are maintaining our 'Hold' rating in Grand Canyon until we see further developments.

Q1 Earnings

In early May of this year, LOPE announced a slight earnings miss (GAAP earnings of $1.94) on a top-line sales beat ($250.12 million) for the first quarter. Highlights of the quarter were strong service revenue which drove revenue per student northward in the quarter once more. Furthermore, LOPE's strong top-line performance drove the operating margin to almost 30% for the quarter. As we see below, Q1's operating margin is well ahead of the 25.57% trailing average which in itself is an elevated number compared to the sector in general. As we stated in our February commentary, Grand Canyon's strong trend with respect to its profitability is the real calling card in this play at present. From a fundamentals standpoint, forward-looking earnings revisions continue to rise where $6.46 is the current consensus EPS estimate for fiscal 2023.

Technicals

However, if we pull up a technical chart of Grand Canyon, we see that the announcement of the company's Q1 earnings actually resulted in shares topping out which may be surprising to many. Growing margins & improving EPS revisions usually lend themselves to a rally in the share price but shares are down over 11% from LOPE's pre-Q1 share price of $120+ per share.

Furthermore, the problem now is that a broadening formation (higher highs & lower lows) looks to be taking hold which essentially is an inverted triangle (diverging trend lines). Suffice it to say, to ensure, we are not dealing with a megaphone top here, it is imperative that the recent June lows of just over $103 a share hold firm to ensure the stock does not print a further lower low in upcoming sessions.

Valuation

If we take into account Grand Canyon's expected growth this year (8.31%), we get a GAAP forward earnings multiple of 16.40. What this multiple shows us is that LOPE is more expensive (from an earnings standpoint) over the sector in general (Forward GAAP multiple of 14.91). This shouldn't surprise investors in that the company's profitability numbers are well ahead of the competition.

One trend though that should be pointed out (as it affects earnings per share and earnings multiples alike) is how LOPE has dialed back the scale of its buybacks in recent quarters. $399 million worth of shares for example were bought back in Q1 of last year, whereas a mere $41 million was bought back in Q1 of fiscal 2023. This trend lower could have been predicted as monies for these buybacks were coming primarily from the company's cash balance. Therefore, given the poor share-price performance over the past six weeks or so, this raises the question of whether this money would have been better utilized elsewhere.

In terms of cash flow, Grand Canyon generated $5.67 of free cash flow per share over the past four quarters. If we divide the company's current share price of approximately $106 by free cash flow per share, we get a trailing free cash-flow multiple of 18.69. Suffice it to say, considering LOPE's strong balance sheet and growth profile, this multiple looks attractive. However, it is not at bargain basement levels which means growth needs to keep coming in order for LOPE shares to be priced higher.

Conclusion

To sum up, although growth is certainly on the agenda for the educational company, the company's average valuation, and recent technicals are causes for concern. Let's see what the second quarter brings. We look forward to continued coverage.