Adtalem (ATGE)

Vocational education company Adtalem Global Education (NYSE:ATGE) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 12.9% year on year to $466.1 million. The company’s full-year revenue guidance of $1.77 billion at the midpoint came in 0.9% above analysts’ estimates. Its non-GAAP profit of $1.92 per share was 16.2% above analysts’ consensus estimates.

Company Overview

Formerly known as DeVry Education Group, Adtalem Global Education (NYSE:ATGE) is a global provider of workforce solutions and educational 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.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Adtalem grew its sales at a 10.5% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Adtalem’s annualized revenue growth of 9.7% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

This quarter, Adtalem reported year-on-year revenue growth of 12.9%, and its $466.1 million of revenue exceeded Wall Street’s estimates by 4.4%.

Looking ahead, sell-side analysts expect revenue to grow 4.7% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges.

Adtalem’s operating margin has been trending up over the last 12 months and averaged 18% over the last two years. On top of that, its profitability was top-notch for a consumer discretionary business, showing it’s an well-run company with an efficient cost structure.

This quarter, Adtalem generated an operating profit margin of 19.4%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Adtalem’s EPS grew at a spectacular 21.9% compounded annual growth rate over the last five years, higher than its 10.5% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

In Q1, Adtalem reported EPS at $1.92, up from $1.50 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Adtalem’s full-year EPS of $6.39 to grow 8.2%.

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.

Adtalem has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 17.5% over the last two years, quite impressive for a consumer discretionary business.

Adtalem’s free cash flow clocked in at $242.5 million in Q1, equivalent to a 52% margin. This result was good as its margin was 17.9 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict Adtalem’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 19.3% for the last 12 months will decrease to 15.8%.

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

Adtalem historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Adtalem’s ROIC averaged 4.9 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

Adtalem reported $219 million of cash and $780.5 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $446.9 million of EBITDA over the last 12 months, we view Adtalem’s 1.3× net-debt-to-EBITDA ratio as safe. We also see its $22.45 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Adtalem beat analysts’ EBITDA expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 2.5% to $119 immediately following the results.

Updated: May 15, 2025 at 10:06 PM EDT

Are you wondering whether to buy Adtalem or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Adtalem isn’t a terrible business, but it isn’t one of our picks. To begin with, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its spectacular EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its Forecasted free cash flow margin suggests the company will ramp up its investments next year. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Adtalem’s P/E ratio based on the next 12 months is 18.8x. Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $141.25 on the company (compared to the current share price of $130.40).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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