Description

Thesis

After a multi-year process of divesting segments with low ROIC, ATGE’s pro-forma business is exposed to growing demand sectors such as nursing, medical, and accounting and will generate mid-single digit organic revenue growth, as enrollments continue to accelerate in a weak economy. A strong management team will continue significant buybacks funded by a large cash position and good cash flow generation, and we expect EPS to grow substantially above the street and reach $4.15 in FY22. The stock is unsustainably cheap at 8.5x P/E on FY22, and we see 55% upside to $54. 

Summary

Since 2016, when current CEO Lisa Wardell took the reins, Adtalem Global Education (formerly known as the DeVry Education Group) has transformed from a geographically diverse company with a number of declining assets into an educational institution focused on degrees and certifications that can close workforce skills gaps and deliver graduates strong job prospects and earnings.

Half of ATGE’s revenues come from Chamberlain University, its college of nursing and public health. To practice as a registered nurse in the United States, nurses must obtain either an associate’s degree or bachelor’s degree and pass the NCLEX, a licensing exam administered by the National Council of State Boards of Nursing. Historically, many students just achieved an associate’s degree, but in the last decade, hospital systems have increasingly prioritized hiring nurses with Bachelors of Science in Nursing (BSN) and other advanced degrees. 

Chamberlain serves three segments of nursing students, each of which drive approximately one third of the revenues. The first segment serves pre-licensure students and provides a BSN normally through in person teaching, currently online. With high demand for nurses, this is a rapidly growing market and inexpensive public options are unable to keep up with demand, often pushing applicants to long wait lists. Chamberlain offers no waitlist to applicants and, in their most recent quarter, a 92% NCLEX pass rate, in line with the national average. This high pass rate, an improvement over previous quarters, will allow Chamberlain to grow enrollments at an accelerated pace as state Boards of Nursing remove enrollment caps and Chamberlain’s higher pay and industry connections secure them the limiting resources for program growth: faculty and clinical placements. 

Chamberlain’s second segment is its online RN-to-BSN program. In 2010, the Institute of Medicine released a white paper entitled “The Future of Nursing”, which recommended that 80% of the nursing workforce hold a BSN (vs. an associates degree, referred to as an RN) by 2020. This paper reinforced an industry wide sentiment that nurses with BSNs drove better health outcomes for patients and led to a push for existing nursing to convert their RNs to BSNs through RN-to-BSN conversion programs. This has been a high growth segment for Chamberlain, but is coming under pressure as more first-time nursing students acquire BSNs and the total number of RNs dwindles. We anticipate that total market growth will slow from +10% y/y in recent years to +1% y/y by CY22. Chamberlain is a market leader in this segment, second to Western Governors University and ahead of Grand Canyon University, and has good partnerships with hospitals, which should protect their enrollments, but we expect slowing growth long term.

Offsetting the slowing growth in this segment, Chamberlain has developed and strengthened its online graduate degree programs. The graduate nursing education market looks similar to the RN-to-BSN market 10 years ago, with a growing number of eligible students (students must have a BSN to pursue an advanced degree) and an industry push to further educate the existing workforce. This has driven graduate enrollments up 8-10% y/y, with Chamberlain taking share and now at 6% market share (second behind Walden University and ahead of Western Governors University).

Chamberlain enrollment grew 5% in Q3.20 and 8% in Q4, an acceleration from 1-2% in prior quarters. Overall, we expect enrollment and revenue growth in mid-single digits as its pre-licensure program grows to meet demand and its online segment shifts from an undergraduate to a graduate degree focus.

ATGE also offers Medical and Veterinary degrees through its American University of the Carribean (AUC) and Ross University Schools of Medicine and Veterinary Medicine. The Medical and Vet segment generates one third of ATGE’s total revenue. The veterinary program is a small but growing segment, as the existing pool of veterinarians reaches retirement age and overall pet ownership increases. The medical segment, similar to nursing, has sustained enrollment growth on undersupply of medical schools.

In the United States, only 41% of applicants were accepted into medical school, leaving a substantial unmet demand. Schools like AUC and Ross educate students abroad and prepare them to take the U.S. Medical Licensing Examination, which allows them to practice medicine in the United States. Both AUC and Ross have good pass rates and strong reputations which, due to two recent crises, are not reflected in current revenue and enrollment trends.

In 2017, Hurricanes Irma and Maria destroyed major infrastructure in St. Maarten and Dominica, then home to AUC and Ross Medical. Since then, Ross Medical successfully relocated to Barbados, while AUC has re-established its campus on St. Maarten, and revenue trends in the medical segment were improving, but both schools saw decreased enrollment as a result of the transition.

This crisis did prepare ATGE well for the COVID disruption earlier this year, as much of their Medical school was temporarily transitioned online in 2017 to provide continuity of education for the students. In March, the medical, vet and nursing students were quickly and successfully transitioned online.

However, COVID had a substantial impact on revenues for the Medical segment, where in-person clinical requirements make up 20% of revenues. Although some clinical hours were transitioned online, many were postponed, causing a 13% y/y decline in revenue in the medical and vet segment in Q4.20. This missed revenue should partly be recouped as students must meet clinical hour requirements and these clinicals have re-started. Accommodation revenue from on-campus housing also suffered and will not be recouped but is a small short-term headwind to an otherwise profitable and growing segment.

We expect low single digit enrollment growth to drive mid single digit revenue growth in the medical and veterinary segments as incremental capacity additions are consistently filled by excess demand.

The most COVID-impacted segment of ATGE’s business is its Financial Services segment. Financial Services drives 17% of ATGE’s revenue, and houses two businesses. The first, Becker, is a clear market-leader in providing test preparation services for CPA qualification exams, serving 99 of the top 100 accounting firms and the Big 4. The second, ACAMS, has a near-monopoly on anti-money laundering certifications, an emerging area of accreditation. It is rare for accreditation agencies to be for-profit and ATGE paid a premium for this high quality business in 2016. While we expect Financial Services’ long-term growth to remain above 5% (c.10% ACAMS offset by weaker Becker), it derives a quarter of its revenue from in-person conferences. ACAMS has temporarily moved its conferences online, and we expect them to recoup the majority of the revenue as attendance is necessary for meeting continuing education criteria.

The Financial Services segment experienced margin compression in FY20, as ATGE ramped up S&M spend in a strategy shift. In February 2020, the Group President of Financial Services resigned and was replaced by expanding the role of COO Stephen Beard, who will continue the new strategy to reaccelerate growth. If successful, this could drive upside to our estimates.

Financial Services helps to diversify ATGE’s revenue away from Federal Title IV funding, which is key for clearing regulatory hurdles surrounding for-profit education. (Institutions participating in federal student aid programs can receive no more than 90% of their revenue from Title IV Federal student loans and grants; in FY18 and FY19, ATGE received just 59% of its funding from Title IV funds.)

Margins were low in FY20 on higher marketing expenses to drive enrollment growth (successful) and COVID costs, leading to an easy comp in FY21. We see increasing margins over the next two years on growing online offerings and leverage from enrollment growth.

Management

CEO Lisa Wardell has been president and CEO since 2016 and a member of the board of directors since 2008. Prior to joining ATGE, Wardell served as executive vice president and COO for the RLJ Companies, a private equity firm. She has since led the organization through two Caribbean hurricanes and successfully re-focused the business through a series of divestitures. In 2018, under Wardell’s leadership, ATGE completed the divestiture of both DeVry University and Carrington Colleges, its two vocational schools. In 2019, ATGE announced the sale of its Business and Law assets in Brazil for $424m, which were struggling due to currency depreciation and government financing issues. ATGE received 10x EBITDA on the sale compared with ATGE’s then valuation of 7.5x EBITDA; the deal closed in F4Q20. 

Wardell took the lead shortly after the acquisition of ACAMS at what was considered too high a price. Since then, she has prioritized substantial share buybacks (20% of outstanding since 2015). Currently, the company has paused share buybacks, possibly as a political move, since they were recipients of CARES Act funding, but we would expect buybacks to begin again in earnest as other high profile companies restart their repurchases. She is focused on growth and is, in our view, a strong CEO  for the company who is not properly appreciated.

Mike Randolfi joined ATGE as CFO in August 2019, so his track record with ATGE is limited but overall positive, with an increase in nursing marketing spend over the last year now starting to yield results. Prior to joining, he served as CFO at Groupon, where he was focused on operational efficiency and improving customer acquisition costs, which is relevant to ATGE’s current strategy. Notably, he made a large share purchase at $34 last November. 

Catalysts

ATGE currently has $500m of cash on the balance sheet from the recent Brazilian divestiture. Our assumption is that most will be eventually deployed toward large share buybacks, though an acquisition is also possible (likely less accretive given the current valuation). Our primary assumption is that the company buys approximately 25% of shares outstanding over the next two years while not exceeding 0.5x net debt to EBITDA.

Prior to the most recent release in August, ATGE screened as a declining business with net debt. Pro-forma for divestitures, it is growing organic revenue in the mid-single digits, with net cash.

In line with historical trends, we expect to see an increase in enrollments, especially for nursing (Chamberlain), during a recession, as high unemployment changes the risk-reward proposition for potential students. With Chamberlain’s short wait time to enrollment, it provides a compelling offer for out-of-work nurses and especially pre-licensure candidates.

Risks

With any for-profit education company, government regulation is a significant risk. ATGE mitigates this risk by focusing on degrees with good job opportunities, creating good outcome statistics, and diversifying revenue sources away from government funding through hospital partnerships in nursing and through the financial services segment.

Although containing strong brands, the financial services segment has recently undergone a management transition and is yet to show results from its growth investments. We currently assume margins are not able to return to pre-2020 levels but will grow back to the mid teens.

As schools across the country migrate their programs online, ATGE faces the possibility of increasing competition for online nursing degrees. This is mitigated by ATGE’s focus on areas that require in-person instruction (nursing and medical) where an online presence will not eliminate resource constraints. RN-to-BSN is the segment most impacted by this competition and ATGE have held their share so far, while taking share in the faster growing graduate nursing programs.

Valuation

We model FY22 EPS of $4.15 vs. consensus of $3.16 as we assume the deployment of excess cash into buybacks. EPS growth accelerates to 30% in FY21, 45% in FY22 so the P/E should move higher. At a 13x P/E on FY22, we estimate shares could trade at $54 in a year’s time, 55% above the current price. Using some of the cash for an acquisition is a possibility; this would likely be less accretive but still leave significant upside.

ATGE trades at 6x FY22 EV/EBITDA with current net cash of $220m, versus a historical range between 6-11x under the current management and peers with higher regulatory risk trading at 6-12x. Our $54 PT implies 10x FY22 EV/EBITDA without accounting for their high ongoing cash generation.

Catalyst

• Deployment of excess cash from the recent Brazilian divestiture and ongoing cash generation to reduce the share count by 25% over the next two years, contributing to significant EPS growth.
• Following the August release, AGTE no longer screens as a declining business with net debt, now showing proforma organic growth and net cash.
• Acceleration of educational enrollments during a recession