We wrote about Grand Canyon Education, Inc. (NASDAQ:LOPE) in June of this year, when we maintained our “Hold” rating on the American education company. As the long-term technical chart below shows, stocks were mostly caught in a pattern of lateral consolidation since 2018, but this “consolidation” may have finally ended, as we learn below. You see, technical aspects are often simply a result of the fundamentals of the business at the time.
Therefore, the lack of direction that LOPE stock has experienced over the past 5 years can be explained by a lack of sustained growth. Remember, the market (being a predictive mechanism) is constantly trying to determine how profitable the stock in question will be over the next 12-18 months. Therefore, the significant change in trend (where shares have gained over 36% since our last commentary in June) should not be taken lightly. We I believe the marginal break above long-term resistance (as shown below) offers a very low risk entry on the long side here as the $125-$130 level should now act as a solid bottom support. Suffice it to say, given what we’ve seen from LOPE over the past few quarters (and particularly its recent Q3 report), we are raising our rating on LOPE from “Hold” to now “Buy.”
Multiple trends point to sustained growth
LOPE is recent T3 The rise in earnings marked the seventh consecutive profit increase for the company. However, it was the magnitude of the earnings rise ($0.18 per share versus consensus) that was most telling. The above-average bottom line is due to both high enrollment figures and above-average retention figures. These trends demonstrate the resilience of Grand Canyon Education and Grand Canyon University as the company has positioned itself to take advantage of the severe workforce shortage that has spread across the states -United lately.
Suffice it to say that it has now become clear that the consolidation that LOPE has experienced over the past five years was indeed a trough due to the COVID-19 pandemic. While traditional universities have decided to reduce their course offerings during the pandemic (due to lack of demand), LOPE has decided to continue investing throughout the cycle and it now appears that the company is on the verge of reap the fruits of these efforts. One of those online investments was tailoring courses to what the market was actually demanding. Rolling out a significant number of new courses was wise because LOPE created these courses with both the student and the employer (who was short of labor) (increased demand) in mind. Additionally, management always kept a check on price increases up front, as they knew profits would be made downstream due to better levels of student engagement.
This strategy allowed students to have a clear vision of the position (and salary) they would get after completing their studies. “Starting with the end in mind” where LODE unconsciously “sold” the “outcome” of completing one’s studies and landing the desired position also had a positive effect on retention rates.
Additionally, with hybrid campus enrollment increasing and GCU’s Workforce Development Center continuing to go from strength to strength, growth appears to continue through 2024 and beyond. Looking at the behavior of traditional students, management noted growing trends in both the subset who continue to attend face-to-face classes on campus as well as the subset who prefer to do their home studies. Growing GCU visits permanently “lock in” customers to LOPE’s business, which is an encouraging trend from an investor’s perspective.
Forward-looking earnings revisions
Suffice it to say that the above uptrends appear to last for a while due to current market conditions. If we look at how the consensus has revised LOPE’s FY2023 earnings upwards over the last 3 and 6 months respectively, we see very similar markups for these periods also in FY2024. This demonstrates that a sustained trend change has taken place, which is evident. short-term growth figures from LOPE. What we mean by this is that leading indicators such as increased service revenue and revenue per student (which had a positive impact on operating margin in the third quarter) all indicate that growth will be sustained in the future.
In summary, based on recent trends, we are upgrading our rating in LOPE from “Hold” to “Buy”. We expect some short-term volatility due to the FTC filing suit against the company, but as long as shares remain above their 2018 highs, we see further gains in Grand Canyon Education. We look forward to continued coverage.