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Grand Canyon Education (NASDAQ:LOPE) Posts Better-Than-Expected Sales In Q4,


Full Report / February 13, 2024

Higher education company Grand Canyon Education (NASDAQ:LOPE) reported Q4 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 7.6% year on year to $278.3 million. Guidance for next quarter's revenue was also better than expected at $272.3 million at the midpoint, 2% above analysts' estimates. It made a GAAP profit of $2.71 per share, improving from its profit of $2.36 per share in the same quarter last year.

Grand Canyon Education (LOPE) Q4 FY2023 Highlights:

  • Revenue: $278.3 million vs analyst estimates of $275.2 million (1.1% beat)
  • EPS: $2.71 vs analyst estimates of $2.65 (2.3% beat)
  • Revenue Guidance for Q1 2024 is $272.3 million at the midpoint, above analyst estimates of $266.9 million
  • Management's revenue guidance for the upcoming financial year 2024 is $1.03 billion at the midpoint, in line with analyst expectations and implying 7% growth (vs 5.4% in FY2023)
  • Free Cash Flow of $106 million is up from -$46.44 million in the previous quarter
  • Gross Margin (GAAP): 56.2%, down from 57.1% in the same quarter last year
  • Enrolled Students: 117,279
  • Market Capitalization: $3.90 billion

Founded in 1949, Grand Canyon Education (NASDAQ:LOPE) is an educational services provider known for its operation at Grand Canyon University.

The company provides a range of services including academic program development, technological support, faculty recruitment, admissions, financial aid, counseling, marketing, and administrative services. Its primary service is operating Grand Canyon University (GCU), a for-profit Christian university.

GCU offers a comprehensive range of degree programs both online and on its Phoenix, AZ campus. The university's programs cover various fields such as business, education, nursing, health sciences, liberal arts, and STEM. GCU is known for its flexible learning options, catering to traditional students, professionals, and online learners, making higher education accessible to a broader demographic.

The company invests in online learning experiences to make remote education engaging, interactive, and effective. This focus has been pivotal in growing GCU’s online student population, making it one of the largest online education providers in the United States.

Education Services

A whole industry has emerged to address the problem of rising education costs, offering consumers alternatives to traditional education paths such as four-year colleges. These alternative paths, which may include online courses or flexible schedules, make education more accessible to those with work or child-rearing obligations. However, some have run into issues around the value of the degrees and certifications they provide and whether customers are getting a good deal. Those who don’t prove their value could struggle to retain students, or even worse, invite the heavy hand of regulation.

Grand Canyon Education primary competitors include Apollo Global Management (NYSE:APO), Laureate Education (NASDAQ:LAUR), Strayer Education (NASDAQ:STRA), Capella Education (owned by Strategic Education NASDAQ:STRA), and American Public Education (NASDAQ:APEI).

Sales Growth

Exploring a company's long-term performance can offer valuable insights into its business quality. Any business can experience brief periods of success, but distinguished ones maintain steady growth over time. Grand Canyon Education's annualized revenue growth rate of 2.6% over the last five years was weak for a consumer discretionary business. Grand Canyon Education Total RevenueWithin consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Grand Canyon Education's annualized revenue growth of 3.5% over the last two years is in line with its five-year revenue growth, suggesting the company's demand has been stable.

We can better understand the company's revenue dynamics by analyzing its number of students, which reached 117,279 in the latest quarter. Over the last two years, Grand Canyon Education's students were flat. Because this number is lower than its revenue growth during the same period, we can see the company's average selling price has risen. Grand Canyon Education Students

This quarter, Grand Canyon Education reported solid year-on-year revenue growth of 7.6%, and its $278.3 million of revenue outperformed Wall Street's estimates by 1.1%. The company is guiding for revenue to rise 8.8% year on year to $272.3 million next quarter, improving from the 2.5% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 6.4% over the next 12 months, a deceleration from this quarter.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Grand Canyon Education has been a well-oiled machine over the last two years. It's demonstrated elite profitability for a consumer discretionary business, boasting an average operating margin of 25.2%. Grand Canyon Education Operating Margin (GAAP)

In Q4, Grand Canyon Education generated an operating profit margin of 35.1%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

Over the next 12 months, Wall Street expects Grand Canyon Education to maintain its LTM operating margin of 25.9%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. Grand Canyon Education EPS (GAAP)

Over the last five years, Grand Canyon Education's EPS grew 72.7%, translating into a decent 11.5% compounded annual growth rate. This performance is materially higher than its 2.6% annualized revenue growth over the same period. There are a few reasons for this, and understanding why can shed light on its fundamentals.

A five-year view shows that Grand Canyon Education has repurchased its stock, shrinking its share count by 38.5%. This has led to higher PER share earnings. Taxes and interest expenses can also affect EPS growth, but they don't tell us as much about a company's fundamentals.

In Q4, Grand Canyon Education reported EPS at $2.71, up from $2.36 in the same quarter a year ago. This print beat analysts' estimates by 2.3%. Over the next 12 months, Wall Street expects Grand Canyon Education to grow its earnings. Analysts are projecting its LTM EPS of $6.91 to climb by 8.7% to $7.39.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Over the last two years, Grand Canyon Education has shown strong cash profitability, giving it an edge over its competitors and the option to reinvest or return capital to investors while keeping cash on hand for emergencies. The company's free cash flow margin has averaged 19.5%, quite impressive for a consumer discretionary business.

Grand Canyon Education Free Cash Flow Margin

Grand Canyon Education's free cash flow came in at $106 million in Q4, equivalent to a 38.1% margin and in line with the same quarter last year.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Grand Canyon Education's five-year average ROIC was 26.7%, placing it among the best consumer discretionary companies. Just as you’d like your investment dollars to generate returns, Grand Canyon Education's invested capital has produced excellent profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Grand Canyon Education's ROIC averaged a 22.9 percentage point increase each year. This is a good sign, and if the company's returns keep rising, there's a chance it could evolve into an investable business.

Key Takeaways from Grand Canyon Education's Q4 Results

It was good to see Grand Canyon Education's strong revenue guidance for the next quarter and full year 2024, which topped analysts' expectations. We were also glad this quarter's revenue and EPS came in higher than Wall Street's estimates, driven by a beat in its enrolled students and an increase in its average revenue per student. Zooming out, we think this was a decent, quarter, showing that the company is staying on track. The stock is up 1.6% after reporting and currently trades at $132.49 per share.

Is Now The Time?

Grand Canyon Education may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We have other favorites, but we understand the arguments that Grand Canyon Education isn't a bad business. Although its revenue growth has been weak over the last five years, its growth over the next 12 months is expected to be higher. And while its number of students has been subpar, its impressive operating margins show it has a highly efficient business model.

Grand Canyon Education's price-to-earnings ratio based on the next 12 months is 17.1x. There are things to like about Grand Canyon Education and there's no doubt it's a bit of a market darling, at least for some investors. But it seems there's a lot of optimism already priced in and we wonder if there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $155 per share right before these results (compared to the current share price of $132.49).

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