Vocational education company Adtalem Global Education (NYSE:ATGE) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 11.8% year on year to $412.7 million. The company's full-year revenue guidance of $1.57 billion at the midpoint also came in 1.8% above analysts' estimates. It made a non-GAAP profit of $1.50 per share, improving from its profit of $1.13 per share in the same quarter last year.
Adtalem (ATGE) Q1 CY2024 Highlights:
- Revenue: $412.7 million vs analyst estimates of $391.7 million (5.4% beat)
- EPS (non-GAAP): $1.50 vs analyst estimates of $1.16 (29.7% beat)
- The company lifted its revenue guidance for the full year from $1.54 billion to $1.57 billion at the midpoint, a 1.9% increase
- Gross Margin (GAAP): 57.5%, up from 55.1% in the same quarter last year
- Free Cash Flow of $142.1 million is up from -$22.38 million in the previous quarter
- Market Capitalization: $1.98 billion
Formerly known as DeVry Education Group, Adtalem Global Education (NYSE:ATGE) is a global provider of workforce solutions and educational services.
Adtalem’s portfolio encompasses several educational institutions and companies, each specializing in different fields. These include Chamberlain University, which focuses on nursing and healthcare education, Ross University School of Medicine and Ross University School of Veterinary Medicine, providing medical and veterinary education, and Walden University, known for its online learning programs in various disciplines. This diverse array of institutions reflects Adtalem’s commitment to addressing workforce needs in sectors like healthcare, veterinary science, and business.
Adtalem focuses on providing practical, real-world education that aligns with industry needs. The company collaborates with employers and professional organizations to design curricula and programs that prepare students for the demands of the job market. This focus ensures that graduates are not only well-educated but also job-ready, equipped with the skills and knowledge needed in their respective fields.
The company also has comprehensive support services, including career advising, job placement assistance, and alumni networks. Adtalem’s focus on student outcomes has helped build its reputation as a provider of quality education and professional training.
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.
Adtalem's primary competitors include Laureate Education (NASDAQ:LAUR), Grand Canyon Education (NASDAQ:LOPE), Strayer Education (NASDAQ:STRA), and Kaplan (owned by Graham Holdings Company NYSE:GHC), and private company Apollo Education Group.Sales Growth
A company's long-term performance can indicate its business quality. Any business can enjoy short-lived success, but best-in-class ones sustain growth over many years. Adtalem's annualized revenue growth rate of 7.6% over the last five years was weak for a consumer discretionary business. 
Within consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Adtalem's annualized revenue growth of 11.1% over the last two years is above its five-year trend, suggesting some bright spots.
This quarter, Adtalem reported robust year-on-year revenue growth of 11.8%, and its $412.7 million of revenue exceeded Wall Street's estimates by 5.4%. Looking ahead, Wall Street expects sales to grow 4.7% 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.
Adtalem has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer discretionary business, producing an average operating margin of 14.7%.
This quarter, Adtalem generated an operating profit margin of 15%, 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 Adtalem to become more profitable. Analysts are expecting the company’s LTM operating margin of 13.6% to rise to 19.7%.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. 
Over the last five years, Adtalem's EPS grew 87.5%, translating into a solid 13.4% compounded annual growth rate. This performance is materially higher than its 7.6% 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 Adtalem has repurchased its stock, shrinking its share count by 32.6%. 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 Q1, Adtalem reported EPS at $1.50, up from $1.13 in the same quarter last year. This print beat analysts' estimates by 29.7%. Over the next 12 months, Wall Street expects Adtalem to grow its earnings. Analysts are projecting its LTM EPS of $4.69 to climb by 6.1% to $4.98.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Over the last two years, Adtalem has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 10.7%, slightly better than the broader consumer discretionary sector.
Adtalem's free cash flow came in at $142.1 million in Q1, equivalent to a 34.4% margin and up 43.9% year on year. Over the next year, analysts predict Adtalem's cash profitability will fall. Their consensus estimates imply its LTM free cash flow margin of 15.6% will decrease to 10.4%.
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? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).
Adtalem's five-year average return on invested capital was 9.7%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Adtalem's ROIC has stayed the same over the last few years. If the company wants to become an investable business, it will need to increase its returns.
Key Takeaways from Adtalem's Q1 Results
We were impressed by how significantly Adtalem blew past analysts' EPS expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates as it recorded 85,809 student enrollments.
Looking ahead, the company raised its full-year revenue and EPS guidance significantly beating Wall Street's projections. Overall, we think this was a strong quarter that should satisfy shareholders. The stock is flat after reporting and currently trades at $52.4 per share.
Is Now The Time?
Adtalem may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Adtalem, we'll be cheering from the sidelines. Its revenue growth has been a little slower over the last five years, and analysts expect growth to deteriorate from here. And while its sturdy operating margins show it has disciplined expense controls, the downside is its relatively low ROIC suggests it has historically struggled to find compelling business opportunities. On top of that, its projected EPS for the next year is lacking.
Adtalem's price-to-earnings ratio based on the next 12 months is 10.5x. While there are some things to like about Adtalem and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.
Wall Street analysts covering the company had a one-year price target of $65 per share right before these results (compared to the current share price of $52.40).
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