A Bright Spot in the Education Sector?

Grand Canyon University is not like other for-profit schools

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Sep 14, 2016
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Grand Canyon College was founded in 1949 as a traditional, private, nonprofit college.

It was originally located in Prescott, Arizona, but moved to its existing campus in Phoenix in 1951. The current location is within a 30-minute drive of three other universities, the University of Arizona, Arizona State University and Arizona Christian University. It achieved university status in 1989 and became known as Grand Canyon University. The school was established as a Baptist-affiliated institution but became an interdenominational Christian university in 2000.

The school introduced distance learning programs in 1997 and online programs in business and education in 2003. By 2003, the school was in poor financial condition and was converted into a for-profit institution in 2004.

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Grand Canyone Education (LOPE, Financial) CEO Brian Mueller joined the company in July 2008. GCU was on the verge of bankruptcy and had its IPO in November 2008 with ticker symbol LOPE. Since that time, Mueller has led an impressive comeback. His team first focused on enhancing the school’s online offerings realizing that the investment in technology would pay off for both online and on-campus students.

Online enrollment has grown from just under 24,000 in 2008 students to about 61,000 in 2016 while on-campus enrollment has grown from 900 in 2008 to over 14,000 in 2016. The tables below show the enrollment breakdown as of the last 10Q.

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GCU has made massive efforts to build up its brand. One key step to brand enhancement was when GCU accepted an invitation to join Division I’s Western Athletic Conference in late 2012. In March 2013, the school hired former Phoenix Suns player and three-time NBA all-star Dan Majerle to coach the basketball team.

Majerle has steadily improved the team’s record from a .500 record in his first season to 27-7 last season. For the coming season, GCU will raise its profile further as it is scheduled to play elite basketball teams such as the former NCAA champion Arizona Wildcats, three-time champion Louisville Cardinals and five-time champion Duke Blue Devils.

As for typical student life, you will see responses like the one below that I found here:

  • "As a private Christian college, GCU students are provided many avenues to explore their spiritual life. From social gatherings to mentorships, there is no shortage of exciting and new activities to fulfill one's spiritual needs and interact with others of the same faith.
  • "With the men's basketball program advancing to the Division I level and the introduction of former Phoenix Suns star Dan Majerle as the head coach, attendance and student involvement with the program has increased and has become one of the top activities enjoyed by students and alumni.
  • "The location of GCU provides the option for off-campus fun within the Phoenix area. After a long week of classes and exams, it is not unusual to see students venture off and explore the surrounding area or take a trip further north for some great hiking and/or camping."

Another way management has enhanced the school’s brand is to invest heavily in the campus. In the video below, you can see how the renovated sports facilities look and get a sense of what would appeal to potential students. The campus has added new tennis courts, a soccer field, living spaces and expanded the basketball arena. GCU even has its own golf course.

In addition to the aesthetics, management has made a concerted effort to enhance the school’s academic profile. GCU added a 170,000-square-foot engineering building along with eight academic excellence centers. The average incoming GPA of new students on campus will be approximately 3.5. That’s up from 3.4 at the end of 2012 when the school raised the minimum GPA level to 3.0. The incoming GPA level for the honors college which has 1,200 students will be 4.1. Overall, it continues to have small class sizes, averaging less than 25 on-campus and less than 15 in the online campus.

What I like about GCU

I’ve written about other for-profit universities in the past. I perceived stocks in the industry as value traps because of the bad publicity. It’s the type of bad publicity that people don’t forget. Students with horror stories of debt and bad outcomes vent and the word-of-mouth spreads. Potential students may have acquaintances who have had bad experiences.

Politicians and the media have been relentless in bashing the industry, too. Recently, the industry received another black eye when ITT Tech was shut down. The school came under scrutiny for its use of federal student loans. GCU recognizes the stigma of for-profit universities and has tried to convert back to a not-for-profit college but had its proposal rejected earlier this year by regulators for unclear reasons. This article discusses the failed conversion attempt.

In its March 8-K, it wrote

“Operating as a for-profit university, we are made aware daily of the adverse views many people have about for-profit institutions, views that we believe, as it relates to Grand Canyon University, are most often expressed out of ignorance for what is going on at our university as well as out of competitive envy by those who feel threatened by our presence here and our undisputed success as a comprehensive university.”

GCU does have more in common with traditional universities than for-profit schools. For-profit schools like the University of Phoenix operate on a transactional level. Students attend classes for convenience, but there isn’t much of an experience beyond that.

Meanwhile, GCU offers the traditional college experience with athletics, on-campus residence, social gatherings, a sense of community and school pride. It targets a huge segment of the population in the Christian community; however, non-Christian students are also welcome. From the parents’ perspective, the Christian affiliation gives them confidence that their children aren’t going somewhere with a party school reputation. From the students’ perspective, there’s sunny weather, new facilities, athletic teams, plenty of activities from which to choose, and it’s in a great location near three other well-known universities.

GCU’s on-campus tuition is in the middle of the pack according to collegecalc.org. In-state tuition for nearby schools Arizona State University and the University of Arizona is about $9,500 to $10,400 per year versus $17,000 per year for GCU and over $22,000 per year for Arizona Christian University. For out-of-state tuition, GCU and Arizona Christian University tuition rates stay the same while the University of Arizona and Arizona State University balloon to over $32,000 and over $24,000. GCU also claims that the average student pays much less than the $17,000 tuition because of the scholarships that the school provides.

When comparing its online programs, GCU’s base program prices are higher than its for-profit competitors, but it’s also had less controversy and is arguably less tainted by the industry’s stigma. The table below shows how GCU stacks up against the competition on financial metrics.

Symbol Company Revenue ($Mil) Rev Growth Rate 5 Year EPS Growth Rate 5 Year ROE ROA ROC EV/EBIT P/E
APEI American Public Education Inc. 322.91 20.5 12.9 13.84 10.9 25.39 3.82 9.76
APOL Apollo Education Group Inc. 2209.66 -6.4 -30.1 -10.81 -5.53 -21.93 0 0
BPI Bridgepoint Education Inc. 543.13 -1.5 0 -24.19 -14.99 -257.99 0 0
CPLA Capella Education Co. 425.36 6.5 -2.5 19.58 14.87 53.19 8.19 17.78
DV DeVry Education Group Inc. 1843.54 1 -14.7 -0.2 -0.15 0.15 22.94 0
LOPE Grand Canyon Education Inc. 827.58 19.4 32.9 23.34 15.5 24.91 8.4 13.34
STRA Strayer Education Inc. 432.46 -4.1 -21 25.79 13.49 90.74 6.34 13.43

Numbers from GuruFocus

GCU’s ROE, ROA and ROC are second only to Strayer University. Unlike Strayer, GCU’s revenue and net income have been growing while Strayer has been trending in the wrong direction. Some of the other schools have more favorable valuation ratios, but their revenue, net income and enrollment numbers don't match GCU.

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The chart above shows how much GCU has been spending on CAPEX. Management has indicated that 2016 will be the apex of spending and that CAPEX will fall starting next year to under $100 million. With all of the new CAPEX spending, management expects to grow on-campus enrollment to 25,000 to 30,000 in the next several years while growing online enrollment by 8% to 9% each year.

What I don’t like

All for-profit schools have regulatory risk, and GCU is no different. The school receives about 75% of its revenue from Federal Direct Loans. Any changes to regulations could negatively affect revenue. For example, the Department of Education has implemented gainful employment rules that seek to prevent students from taking on too much debt. The amount that students can borrow will be limited by debt service-earnings ratios. There’s still uncertainty surrounding the impact of these rules. There’s also the possibility that the school could be investigated for noncompliance of regulations such as recruiting practices.

Management may also have a conflict of interest with shareholders. This conflict was exhibited when management tried to convert the institution to a traditional not-for-profit school. Is management spending money in the best interest of shareholders, or does it perceive itself as having a higher purpose? It’s similar to how investors might wonder if technology companies wisely spend money on unrelated moonshot projects. Management takes pride in not having raised on-campus tuition for the last eight years. It's also only applied minimal online tuition increases. Another concern is the increase in online competition. More and more traditional colleges are offering online courses on their own or through Coursera. Companies like Udacity are also options for students.

Final thoughts

Evaluating GCU as an investment ultimately comes down to the question of whether you think enrollment will continue to rise. It’s estimated that 80% of college students will switch their majors at least once. Many incoming students are unsure of what they want to study and choose their school to a large degree on environmental factors. GCU has much to offer in the way of weather, the newly renovated campus, the Division I athletic program and the Christian community. I expect the on-campus segment to grow.

On the other hand, it’s not clear to me if the above variables translate into a competitive advantage for the online program which makes up the majority of the student body. Many online students are working adults over the age of 25. Will the school’s marketing efforts be enough to continually attract these adults at the current pace? I consider this to be a medium-risk, medium-reward stock.

Disclosure: The author does not own any stocks mentioned in the article but may take a position in LOPE if the price becomes more attractive.

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