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Whitney Tilson Digs Deeper Into K12 (Which He Is Short) and Is Shocked by What He Finds

October 04, 2013 | About:
Canadian Value

Canadian Value

123 followers
Below is Tilson's latest commentary provided to his followers.

Another day, another round of conversations with people with dealings with K12 – and I’m sure you’ll be shocked – SHOCKED! – to hear that they’re saying the exact same things everyone else has told me: K12 is a bad actor that’s hurting kids, and everyone who matters now realizes it. I have yet to find a single person (at least who’s not directly or indirectly on K12’s payroll) who says anything good about this company…

Below are my notes from what a current board member of a K12 school told me this week (example: “Everything you and the disgruntled employees say is right. The company is inherently broken.”). Based on this and many other conversations, I’ve made substantial updates to my presentation, which is now at 132 pages (the latest version is always posted at: www.tilsonfunds.com/K12-Tilson-9-17-13.pdf; also, the article I published is posted here).

The growth story here is over, but the stock, even after steadily declining the last two weeks, still trades at 42x trailing earnings. Just like the for-profit colleges, it’ll get cut in half once investors realize the growth story is over – and then cut in half again once the company has to shrink (which is what’s necessary to serve the kids who can benefit from online schools).

By the way, lest anyone think I’m implacably opposed to all online education, know that my father earned an MBA degree from the University of Colorado at Colorado Springs in 2003 after studying entirely online for five years while living in Ethiopia. As I’ve said before, this method of learning can be an excellent option – sometimes the only option – for many students. It’s just that K12 (and many of its peers) have wildly oversold online schools to states/legislators and students/parents in the mad pursuit of growth to prop up a stupidly overvalued stock. It’s a classic case of a company running amok to inflate its stock. I’ve seen it countless times in my 15-year investing career, most commonly in the financial sector (it’s so easy to lie about reserves and loan losses), but another classic case is the for-profit colleges (and look how that ended).

If you’re interested in reading more about K12, see:

· Stephanie Simon of Politico wrote a two-part series on K12 last week that is truly an outstanding piece of journalism. Most stunningly, she got K12 Executive Chairman Nathaniel Davis to admit that the company’s Scantron test results, which K12 peddles to shareholders, politicians, regulators, etc., can’t be relied on. She also got Susan Patrick, president of the International Association for K-12 Online Learning, an industry trade group, to admit:

“Unless we address these quality issues that have emerged quite profoundly,” the poor performance of cyber schools will “put the entire industry of education innovation at risk. We need to have an honest discussion about this.”

She also documents how K12 and other online charters spend big money to buy off politicians.

See: Cyber schools flunk, but tax money keeps flowing and From China to Chicago, K12 Inc. markets more than virtual schools

· I engaged in an exchange of letters with my friend Jeanne Allen of the Center for Education Reform, who attacked my analysis and defended K12. See the first exchange of letters here and the second here.

Lastly, here are my notes from a conversation with someone who’s on the board of a K12 school:

Everything you and the disgruntled employees say is right. The company is inherently broken.

K12 simply doesn’t know how to manage schools. The systems and business processes inside the company are broken or don’t exist. The notion that they have any kind of national model that they’re consistently replicating across all of their schools is simply false. And they’ve been so focused on growth that basic stuff isn’t there or doesn’t work. The culture of the company is just bad in many ways. You can rarely get them to execute on anything in a timely manner. It’s like pulling teeth to get them to respond to anything promptly.

K12 was enrolling kids over the phone or online, without intentional regard for fit and careful likelihood to succeed. They advertise to the wrong demographic. And, they are enrolling a very large number of new students in August and September – after the school year has started – which is indicative of why growth hasn’t been the right kind of growth.

K12 apparently thinks teachers are a necessary evil and have a factory production line model. In some ways it’s become a businessman’s approach to education, which I don’t inherently mind (as a businessman myself), but they’ve tried to make teachers become something they are not.

Our teachers report that they are only able to spend 30% of their time actually teaching kids; the rest of their time they’re required to do other things. Great teachers love to teach kids. Our teachers are not able to focus 100% of their time doing what they’re trained to do.

The assessment culture that K12 has desperately thrown at this doesn’t work. Our teachers have to use several different systems and can’t get real-time data – it takes many days or even weeks.

What gets measured gets managed. K12 has teacher metrics that have nothing to do with educating kids. It’s absurd. Teachers don’t respond well to being managed in the same way some might try to manage a sales team.

Across all of K12’s virtual academies nationwide, teacher satisfaction is not great.

Everything you said about the nonprofits not being fully independent, about K12 exercising an inappropriate level of control was certainly true at our school for more than a decade.

One of the problems with the nonprofits K12 contracts with: most have no staff, so they are totally dependent on K12. There’s no review of invoices, no independence, no accountability. K12 received nearly 80 cents of every dollar we received from the state, excluding teacher salaries. It’s outrageous!

They’ve forgotten that we’re the customer and they’re the vendor.

K12’s reputation is very poor in our state. It’s usually all about spin and manipulation. Nothing is ever their fault.

Some folks here in our state believe that K12 is a bad actor. There needs to be an inquiry at the state and federal level into this industry and some of these education management companies. Some practices and the corporate cultures are worse than what we’ve seen with some of the bad actors in the for-profit college space.

Knowing what I know now, I’d dump the stock.

About the author:

Canadian Value
http://valueinvestorcanada.blogspot.com/

Rating: 2.0/5 (4 votes)

Comments

LwC
LwC - 1 year ago
"Lastly, here are my notes from a conversation with someone who’s on the board of a K12 school:

Everything you and the disgruntled employees say is right. The company is inherently broken…"

I wonder why this person continues as a board member.

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