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Bridgepoint Education

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BRIDGEPOINT EDUCATION By: Kannu Priya, Ryo Seob (Joseph) Kim and Rui (Cindy) Deng Mar 27, 2012 Recommendation Even with expected negative growth in 2012, the current ... – PowerPoint PPT presentation

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Title: Bridgepoint Education


1
Bridgepoint Education
  • By Kannu Priya, Ryo Seob (Joseph) Kim
  • and Rui (Cindy) Deng Mar 27, 2012

2
Agenda
  • Introduction
  • Macroeconomic Review
  • Industry Overview
  • Company and Business Overview
  • Financial Analysis
  • Financial Projections
  • Recommendations

3
Introduction
  • Bridgepoint Education
  • Headquartered in San Diego, California
  • Provides postsecondary education services
  • Over 400M in net cash and investments
  • Market cap 1.26B

4
Introduction
  • Position in GICS (Global Industry Classification
    Standard)

253020 Diversified Consumer Services 25302010
Education Services
Companies providing educational services, either on-line or through conventional teaching methods. Includes, private universities, correspondence teaching, providers of educational seminars, educational materials and technical education. Excludes companies providing employee education programs classified in the Human Resources Employment Services Sub-Industry
5
Introduction
  • Screening process

  BPI COCO APOL
Mkt Cap 1260000 368440 5360000
Ratio 1 1.21 -0.15 0.76
Ratio 2 0.28 -0.17 0.22
Sum 1.49 -0.32 0.98
       
PEG 0.52 -1.83 1.64
P/E 8.04 28.55 12.02
Fwd P/E 8.52 7.75 12.58
Implied 1 yr g -5.63 268.39 -4.45
Implied 5 yr g 15.46 -15.60 7.33
Implied 7-10 yr g N/A 10.03 1.76
As of Mar 25, 2012 (Source Yahoo! Finance)
6
Introduction
  • Stock Market Prospects
  • P/E (ttm) 8.04
  • It seems to be priced for zero growth and
    eventual bankruptcy.
  • But in fact, most analysts who follow the stock
    see a bright future for Bridgepoint. 

As of Mar 25, 2012 (Source Yahoo! Finance)
7
Macroeconomic Review
  • Unemployment rate A leading indicator rather
    than a lagging indicator of recovery and GDP
    growth

Source Capital IQ
8
Macroeconomic Review
  • Economic growth accelerated recently
  • The labor market stabilized Unemployment rate
    inched down to 8.3
  • The employment population ratio remain stable and
    showed early sign of improvement
  • Outlook for 2012
  • Unemployment rate will remain between 7.5 and 9
    but more volatile due to the growing number of
    discouraged workers re-entering the labor force.

9
Macroeconomic Review
  • Personal income increased 37.4 billion, or 0.3
    percent in January 2012.

Source The Bureau of Economic Analysis
10
Industry Overview
  • Education and training service industry is a
    broad category that encompasses job-specific
    certification, professional training and classes
    emphasizing self-fulfillment, leisure and
    hobbies.
  • The US education and training service industry
    includes about 45,000 companies and many more
    self-employed individuals with combined annual
    revenue of more than 30 billion.

11
Industry Overview
  • Major services
  • Technical and trade schools (nearly 40 of
    industry revenue)
  • Business schools and computer training (nearly
    20 of industry revenue)
  • Characteristics
  • Fragmented The 50 largest companies represent
    30 of total revenue
  • Labor-intensive Average annual revenue per
    worker is around 65,000

12
Industry Overview
  • Demand Drivers
  • Employment trend
  • Personal income
  • Profitability Drivers
  • Number of students recruited
  • Operating costs
  • Instruction expenses Faculty salaries, course
    materials, bad debt expense, lease and occupancy
    costs, and educational equipment
  • Administration expenses Direct marketing,
    finance and accounting, admission expenses, and
    legal fees

13
Company and Business Overview
  • Background
  • Bridgepoint Education operates through Ashford
    University and University of the Rockies. The
    company was founded by Warburg Pincus and
    current management with an aim of improving upon
    the online degree market's prevailing value
    proposition.
  • The company is a regionally accredited provider
    of postsecondary education services. It offers
    associate's, bachelor's, master's and doctoral
    programs in the disciplines of business,
    education, psychology, social sciences, and
    health sciences.

14
Company and Business Overview
  • Background
  • Bridgepoint Educations two academic
    institutions, Ashford University and University
    of the Rockies, were named to the 2012
    Presidents Higher Education Community Service
    Honor Roll, the highest federal recognition a
    college or university can receive for its
    commitment to volunteering, service-learning and
    civic engagement.
  • Ashford University is a private, for-profit
    university located in Clinton, Iowa. It is the
    largest educational holding of Bridgepoint
    Education ( 90 revenues from AU, 10 from
    Rockies) Although the university is regionally
    accredited by The Higher Learning Commission of
    the North Central Association of Colleges and
    Schools, it has begun the process of seeking
    regional accreditation from the Western
    Association of Schools and Colleges.

15
Company and Business Overview
Financial Highlights
FOR THE YEAR ENDED DEC. 31 2007 2008 2009 2010 2011
Total enrollment 12,623 31,558 53,688 77,892 82,100
Revenue 85,709 218,290 454,324 713,233 933,349
Operating income 3,983 33,420 81,730 216,421 273,747
Net income 3,287 26,431 47,105 127,580 172,764
Earnings per share fully-diluted 0.01 0.16 0.74 2.14 3.02
Cash provided by operations 10,367 70,748 131,727 189,949 220,808
In thousands
Source Annual Report
16
Company and Business Overview
Revenue and EPS Trend
Source bloomberg
17
Company and Business Overview
Current Holdings
Source bloomberg
18
Company and Business Overview
College Ranking as per data from US Department of
Education
Rank School School Type Repayment Rate Retention Rate Tuition Score
1 California University of Pennsylvania Online Non-Profit 54 74 11,914 85.49
2 Western Governors University Non-Profit 51 76 5,870 80.39
3 Iowa Central College Non-Profit 54 55 5,790 79.36
4 National University Non-Profit 51 79 11,088 78.97
5 Abilene Christian University Non-Profit 62 71 22,760 76.80
6 Jones International University For-Profit 49 89 11,880 76.24
7 Northcentral University For-Profit 57 63 8,400 76.21
8 Bellevue University Non-Profit 55 38 6,150 73.70
9 Concord Law School For-Profit --- 75 9,984 72.37
10 University of the Rockies Online For-Profit 52 --- 12,096 71.44
Source http//www.guidetoonlineschools.com/online
-colleges
19
Company and Business Overview
Rank School School Type Repayment Rate Retention Rate Tuition Score
11 Northeastern University Non-Profit 74 93 36,792 70.39
12 City University Non-Profit 59 30 15,474 67.34
13 Colorado Technical University - Online Grad For-Profit 39 84 10,665 66.96
14 Liberty University Online Non-Profit 45 71 18,064 62.41
15 Western International University For-Profit 35 67 10,480 57.96
16 Upper Iowa University Online Non-Profit 50 61 22,350 56.45
17 Saint Leo University Online Non-Profit 39 69 18,150 56.39
18 University of Phoenix For-Profit 44 52 10,120 56.38
19 Grand Canyon University For-Profit 52 25 16,500 56.29
20 Academy of Art University Online For-Profit 44 63 18,050 55.35
Source http//www.guidetoonlineschools.com/online
-colleges
20
Company and Business Overview
Rank School School Type Repayment Rate Retention Rate Tuition Score
  • Graduation rates for students who have completed
    at least two courses at Ashford was 51 for
    bachelors students and 74 for masters students.
  • Bachelor degree graduate salaries increased 11.6
    y/y

21 Bryant and Stratton College Online For-Profit 23 73 15,120 51.87
22 Ashford University For-Profit 45 36 16,270 49.86
23 Capella University For-Profit 40 29 10,980 46.81
24 Walden University For-Profit 41 29 9,480 45.98
25 Colorado Technical University - Online For-Profit 39 34 11,660 44.52
26 University of Maryland University College Non-Profit 37 37 12,288 42.99
27 ECPI College of Technology Online For-Profit 29 51 13,550 41.60
28 AT Still University Non-Profit 33 --- 24,156 36.27
29 American InterContinental University For-Profit 39 14 15,465 36.27
30 Argosy University Online For-Profit 37 33 19,812 33.10
Source http//www.guidetoonlineschools.com/online
-colleges
21
Company and Business Overview
Source bloomberg
  • BPI has among the lowest market cap compared to
    its competitors
  • Since the companys P/E is below the industry
    average, the stock looks cheap

22
Company and Business Overview
  • Enrollments
  • Total student population of 86,642 was ahead of
    market estimates of 84,570 representing an
    increase of 11.2 y/y.
  • Management expects the new student enrollment
    decline next quarter to be smaller than Q4 before
    turning positive in Q2, Q3, and Q4.
  • Management expects total population growth to be
    positive in all four quarters of 2012, in part
    reflecting strong improvements in retention.

Source Annual Report 2010
23
Company and Business Overview
  • Positives
  • Low tuition price results in a favorable student
    proposition and limits private loan exposure. It
    is one of the distinctive aspects of the company
    (26 less expensive than comparable publicly
    traded online schools). Its credit-hour prices
    are comparable to those of state-funded
    institutions and its liberal credit transfer
    policy brings the cost even lower.
  • The low price point benefits Bridgepoints
    students as tuition is mostly covered by federal
    financial aid (Title IV), leaving only a minimal
    need (lt1) for private loans.
  • Ashton University brings with it, the heritage
    and long established traditions, both of which
    appeal to potential students. The traditional
    feel is an important competitive advantage.
  • Approximately 77 of Ashfords students pursue
    bachelors programs, as they provide the right
    balance of revenue duration and market size, it
    brings advantage for the company

24
Company and Business Overview
  • Innovation in productivity- Strengths
  • Constellation
  • Bridgepoints proprietary suite of web-based
    course materials, is replacing third-party
    textbooks in many of Ashford Universitys
    courses.
  • This contributes to student affordability, allows
    students to save money on course materials
    approximately 50 over traditional textbooks
    while enhancing the overall learning experience
  • It is expected to save 80 by the end of 2012
  • Rockies Mobile
  • Anytime and anywhere access to systems and
    content
  • Mobile app for Apples iPhone and other mobile
    devices. With convenient,
  • anytime and anywhere access to information, this
    app allows University of the Rockies students to
    connect
  • with courses, post to discussions, follow
    threads, interact with instructors, monitor
    school news and events, and stay on top of
    enrollment and academic matters.

25
Company and Business Overview
  • New Technology- Strengths
  • In January, Bridgepoint showcased the external
    version of Constellation, called Thuze, and
    announced partnerships with three major textbook
    publishers for a beta test of 850 students at 200
    public and private universities across the U.S.
  • While management commented that it is too early
    for specific feedback from the trial, management
    believes that Thuze has been well received by
    educators and publishers and management is
    enthusiastic that the technology has large
    potential for mobile platforms
  • The company believes that its focus on innovation
    and technology is a significant differentiator in
    providing a quality education to its students.
  • The company plans to continue branding efforts in
    2012 to build awareness. It has also decided to
    shift toward more expensive lead sources, which
    its own data analysis has shown results in
    students that retain at higher rates and
    ultimately are more profitable in the long run.

26
Company and Business Overview
  • Internal External Challenges
  • BPI and its peers have become the focus of
    increased regulatory scrutiny from the
    regulators.
  • The gainful employment regulations effective
    July 1st 2011, require that, for-profit
    institutions comply with certain marketing and
    incentive compensation policies and adhere to
    specific levels of graduate salaries and student
    debt in order to remain eligible under the Title
    IV federal student aid program.
  • BPIs has historically focused on growth in
    enrollments and the revenue, which may distract
    the management from ensuring proper reinvestments
    in academic quality and infrastructure. BPI
    currently boasts of the highest gross margin in
    the sector (72 in 2011). Therefore, its
    important for investors to monitor that proper
    reinvestments are made into the instructional
    costs (faculty esp., admissions counselors and
    content) that reinforce academic quality and
    productive academic outcomes.
  • Also, online schools, such as the ones owned by
    Bridgepoint, The recently completed Office of
    Inspector General (OIG) audit at Ashford
    University has identified certain Title IV
    compliance issues, which seem manageable but may
    have negative regulatory consequences for the
    company.
  • Management expects 2012 net income to decline
    17-20 y/y (to 138.2-143.7 million), due to
    increased investments in branding, data
    analytics, and class size reductions, among
    others.

27
Company and Business Overview
  • Title IV and Cohort Default Rates
  • As of the year-end December 31, 2011, Ashford
    University derived 86.8 of its revenues and
    University of the Rockies derived 85 of its
    revenues from Title IV funds. Management is
    confident that it can continue to manage this
    metric going forward.
  • Ashford Universitys two-year cohort default rate
    (CDR) for 2009 was 15.3, and the just released
    draft two-year CDR for 2010 was 10.4. For the
    University of the Rockies, the two-year CDR for
    2009 was 3.3 and the 2010 draft CDR was 3.9.
    The Regulations require less than 25 CDR for the
    trigger of the rule against the company
  • Earlier this week, the company received draft
    three-year CDRs, which were 20.2 for Ashford and
    3.3 for the University of the Rockies.
    Management expects these rates to trend lower in
    the future as the company continues to invest in
    attracting and retaining better-performing
    students.

Title IV Programs (the 90/10 rule) - 2011 Title IV Programs (the 90/10 rule) - 2011 Title IV Programs (the 90/10 rule) - 2011 Title IV Programs (the 90/10 rule) - 2011
(of total rev.) 2009 2010 2011
Ashford U 85.50 85.00 86.60
U of R 84.60 85.90 85
(of Total Rev) 2007 2008 2009 2010
Ashford U 13.30 13.30 15.30 10.40
U of R 0.00 2.50 3 3.90
28
Financial Analysis
- BPI has a strong cash generating business and
has built excess amount of cash from last few
years high growth in its business. (FCF in 2011
186.3 mn, N/I in 2011 172.8 mn.)
- Cash and Investment Assets are worth 0.41 bn
(66.4 of total assets) with its M. Cap 1.26 bn.
- BPIs capital expenditure is expected to be
stable in future (4 of total Rev.) . Therefore,
the increase in Cash and Investment Assets are
expected to continue (but at a lower rate).
29
Financial Analysis
  • BPSs growth has been strong in the past because
    of the economic downturn and of relatively low
    admissions standard.
  • -gt Focused on providing bachelors degree to
    working adults
  • The growth in Rev. and Number of Enrollment is
    expected to be lower mainly due to new
    regulations.
  • -gt Negative growth in Enrollment in Q3, Q4 in
    2011 and the growth is expected to turn positive
    from Q3 in 2012
  • OP margin is expected to be slightly lower in
    near future due to the increase in Instructional
    and marketing cost.
  • Growth rate of Rev. is expected to be higher than
    that of Enrollment. (Increase in tuition fee and
    other sources of Rev.)

30
Financial Analysis
2010 2011
NP Margin 17.89 18.51
Total Asset Turnover 1.86 1.72
Equity Multiplier 2.06 1.83
ROE 68.44 58.38
  • Current P/B ratio is 3.60, but with BPIs high
    ROE, high P/B ratio seems justifiable (58.38/3.6
    16.21 return).
  • However, ROE in the future is expected to be
    slightly lower in near future because of lower NP
    margin and lower TAT.

ltOutlook for 2012gt - 2012 will be a new stage
for companies in the education sector because of
the new regulations and improvement of labor
market in the states. - Hard to project figures,
especially with the new situation for the
company. - According to the managements
guidance, 10 growth in rev. and enrollment, 24
as OP margin, 17 decrease in EPS in 2012.
31
Conservative Management
  • Actual Earnings have always been higher than the
    managements guidance.

Source Earnings.com
32
Multiple Valuation
  • BPI is being traded at discount even with its
    higher-than-industry average growth, margin, and
    ROE.
  • BPI looks competitive because BPI has retained
    its margin higher than its competitors even with
    its low price strategy.
  • Because of the new regulations, its long-term
    future growth rate is expected to be around 11,
    so it is justifiable for BPIs valuation to be 13
    times its earnings.
  • Target price for BPI is 36.70 with expected EPS
    2.77 in 2012. (47 upside potential)

Rev Growth EPS Growth OP Margin ROE P/E P/B P/S
Industry Avg. 6.71 10.15 19.10 42.51 11.04 5.13 1.22
BPI 30.86 39.24 32.80 58.38 8.03 3.53 1.35
APOL -3.91 7.75 23.80 35.29 10.05 4.04 1.26
DV 13.95 20.66 19.30 17.87 10.47 1.73 1.12
EDMC 15.11 35.77 15..80 9.25 10.42 0.95 0.73
33
Ownership Structure
  • Warburg Pincus
  • A private equity firm that owns 66.4 of BPIs
    total shares.
  • Unlike other firms in the same industry, BPI has
    a unique ownership structure and it is important
    to know what Warburg Pincus can do with BPI in
    future
  • ltScenariosgt
  • If Warburg Pincus decides to sell BPI to other
    company, there will be high premium on BPI
    because of premium on its business value plus its
    EV/EBITDA (3.2) is lower than the industry
    average (4.4).
  • If BPI starts paying dividends (when Warburg
    Pincus is trying to get its initial investment
    back by receiving dividends), stock price will
    likely go up (without any harm to BPIs business
    operation.)

Payout Ratio Payout Ratio Payout Ratio Payout Ratio
20 30 40 50
N/I in 2012 156,246 156,246 156,246 156,246
Dividend Amount 35,446 53,170 70,893 88,616
DPS 0.55 0.83 1.11 1.39
Dividend Yield 2.18 3.26 4.35 5.44
34
Recommendation
  • Even with expected negative growth in 2012, the
    current price is attractive. (Both down-side risk
    and up-side potential exit)
  • Projection for future is difficult with new
    regulations and a relatively short history of the
    on-line for-profit education industry.
  • But BPI has its own strength over its competitors
    and proved its competitiveness during the last
    3rd and 4th quarters.
  • BPIs ownership structure seems positive rather
    than negative to equity investors.
  • Therefore, we recommend to buy 500 shares of BPI
    at a market price, which is worth about 12,735.

35
QA
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