On Nov 11, Zacks Investment Research upgraded Grand Canyon Education Inc. (LOPE) to a Zacks Rank #1 (Strong Buy). Estimates have been moving upwards ever since the education company posted better-than-expected third quarter 2014 results and provided an optimistic outlook for the fourth quarter on Oct 29.
Why the Upgrade?
Grand Canyon Education’s share price has increased about 11% since the company released the third quarter 2014 results.
Strong Third Quarter Results
Grand Canyon Education’s third-quarter 2014 earnings of 62 cents a share climbed 26.5% year over year due to higher-than-expected enrollment growth, solid revenue increase, strong operating margins and lower tax rate. Earnings were higher than the company’s expectation of 53 cents by 17%. Earnings also beat the Zacks Consensus Estimate of 54 cents by 15%.
Revenues increased 14.9% from the year-ago levels due to a solid increase in total enrollment. Quarterly revenues of $175.1 million were ahead of the Zacks Consensus Estimate as well as the company’s expectation of $169 million by 3.5%.
Total enrollment rose 13.7% from the prior-year quarter to 68,122, as both ground enrollment and online enrollment increased in double digits. Total enrollment also exceeded the company’s expectation of 67,000 students. New enrollment grew in the mid-single-digit range.
Operating margin increased 180 basis points (bps), driven by strong revenues, disciplined cost management and lower bad debt expenses. As a percentage of revenues, instructional cost of services decreased 150 basis points year over year due to a decline in bad debt expense.
Increased Guidance for Fourth Quarter
The company raised its guidance for the fourth quarter and fiscal 2014 on the back of higher revenue expectations. The guidance includes the impact of lower tax rates and lower share count.
For fourth quarter 2014, the company expects net revenue of $184.5 million higher than the prior expectation $181.6 million. Earnings per share are expected to be 66 cents, higher than the prior expectation of 63 cents. The company maintained its operating margin guidance at 27.8%. Student count guidance was raised to 67,300, up from the prior expectation of 66,700.
For full year 2014, the company expects net revenue of $685.6 million, higher than the prior expectation of $676.6 million. Operating margin is expected at 26.1%, higher than the prior expectation of 25.7%. Earnings per share are expected to be $2.33, higher than the prior expectation of $2.21 per share.
Improving Enrollment Trends
Grand Canyon Education has been consistently witnessing strong enrollment growth on the back of its low tuition cost, full time faculty, small class size and efficient service oriented counseling teams. The company’s career-oriented programs have a steady demand among students.
These strong enrollment trends have helped the company to post better-than-expected earnings and revenues in the past few quarters. As a result, management raised its expectation for revenues, earnings per share, student count for the fourth quarter of 2014.
Other Stocks to Consider
Other stocks in the education industry worth considering include GP Strategies Corp. (GPX), Lincoln Educational Services Corp. (LINC) and Capella Education Co. (CPLA). All the three education companies sport a Zacks Rank #1 (Strong Buy).
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