Funding thesis:
Perdoceo Training (NASDAQ:PRDO) sports activities a lovely valuation at simply 8.4x ahead P/E versus the sector median of 15.4x and has posted strong monetary efficiency together with increasing working margins and a wholesome stability sheet. Nevertheless, the for-profit schooling business faces intensifying scrutiny beneath the Biden administration over points like gainful employment and 90/10 rule modifications, and Perdoceo itself is beneath investigation by the Departments of Training and Justice. Current insider inventory gross sales by executives together with the shock resignation of the corporate’s CEO in lower than two years additionally elevate some warning flags. I consider the inventory deserves a maintain ranking as a consequence of mounting regulatory headwinds, at the least till there’s additional readability.
Firm Overview
Perdoceo operates three primarily on-line for-profit universities – Colorado Technical College and American InterContinental College. Perdoceo operates completely on-line, with over 97% of its ~39,000 college students enrolled in on-line diploma applications throughout enterprise, IT, healthcare, and different fields as of the final 10k submitting. Enrollments as of the most up-to-date quarterly launch are at 36,400, declining persistently year-over-year. The scholar physique can also be largely non-traditional, with 76% enrolled in enterprise applications and 68% aged over 30. TTM income is $730 million.
Regulatory Troubles Mounting
The for-profit schooling business has confronted rising scrutiny in recent times from regulators and policymakers. Efforts by the Division of Training to restrict eligibility and federal support for poor-performing applications or faculties might considerably impression gamers like Perdoceo.
Particular areas of focus embrace the 90/10 rule, which caps the share of income that for-profit faculties can obtain from federal pupil support sources. An much more restrictive model has taken impact in 2023 which has made compliance more difficult. Breaching the 90/10 restrict for 2 straight years would threaten accreditation and federal support eligibility.
There may be additionally a push to carry again “gainful employment” laws that had been rescinded in 2019. These guidelines can revoke federal support eligibility for applications whose graduates have extreme debt burdens in comparison with earnings. The Division has signaled plans to introduce new gainful employment guidelines in 2023.
Perdoceo faces not solely stricter laws however higher enforcement as properly. Each the Division of Training and the Division of Justice have despatched info requests concerning the corporate’s pupil recruiting, advertising, and monetary support practices. This has affected pupil enrollments over the previous couple of years, that are down from 42,700 in 2020 to 36,400 as of the final reported quarter.
CEO Departure & Insider Gross sales
In November 2023, Perdoceo introduced the shock resignation of CEO Andrew Hurst after lower than two years on the job. The corporate reinstalled former chairman and CEO Todd Nelson to the highest put up.
Whereas the explanations for Hurst’s exit are unclear, the abrupt change raises questions in regards to the firm’s management stability and strategic course. Nelson himself brings controversy – he’s being sued over the alleged wrongful demise of his daughter-in-law, though he has vehemently denied the allegations by his lawyer.
Moreover, Nelson has executed important gross sales of Perdoceo inventory over the past couple of months. Different executives additionally offloaded shares final fall. The insider promoting hints that management might even see additional draw back forward.
Monetary Efficiency Stable, Valuation Reductions Regulatory Threat
Perdoceo has posted spectacular monetary outcomes all through. Regardless of some hiccups, revenues grew healthily over the past 5 years, up from $578m to $730m within the final twelve months. Outcomes have been aided by larger pupil retention and decrease normal & administrative prices as a proportion of income.
The corporate additionally carries a strong stability sheet, with ~$600 million in money towards negligible debt. This supplies flexibility for natural investments and acquisitions – Perdoceo just lately made purchases to broaden its choices in healthcare, IT, and cybersecurity coaching.
The inventory trades at simply 8.4x ahead P/E in comparison with over 15x for its closest publicly traded for-profit schooling friends. A variety of the regulatory threat has already been discounted within the worth.
Bulls will level to the potential for continued margin growth, natural development alternatives in areas like healthcare coaching, and upside from current acquisitions. Execution of the corporate’s technique might additionally make it a lovely takeover candidate.
However finally, the regulatory storm clouds make it troublesome to get too constructive, particularly given the departure of the CEO and insider gross sales. Whereas the danger/reward calculus appears favorable for worth and contrarian buyers, I favor to stay on the sidelines for now.
Upside Catalysts
Margin growth if retention stays excessive and enrollment developments enhance Accretive acquisitions that broaden presence in rising areas like healthcare coaching Regulatory reversals following an administration change Settlement of Division of Training investigation with out penalties Profitable integration of current Coding Dojo and CalSouthern acquisitions Inventory repurchases supported by giant money stability
Draw back Catalysts
Stricter “gainful employment” guidelines result in lack of federal support eligibility for sure applications Failure to adjust to new 90/10 rule caps and required audit processes Penalties, fines or operational restrictions ensuing from DoE investigation Reputational harm from controversies hurting enrollment and retention Insider gross sales and CEO change indicative of concern over coming outcomes Recession reduces demand for discretionary schooling spending Acquisitions fail to drive development and require important funding
Conclusion
Perdoceo Training presents an intriguing threat/reward profile, with strong monetary developments and a reduced valuation that will provide a major margin of security. Nevertheless, the elevated regulatory uncertainties, current senior management modifications, and insider promoting hold me impartial on the inventory till there’s extra readability. Worth buyers can keep opportunistic if any surprising optimistic catalysts emerge.