Laureate Education: Growth Amidst Market Dynamics (NASDAQ:LAUR)

Laureate Education (NASDAQ:LAUR) stands as a mid-cap stock, boasting a market cap of $2.1 billion. With a modest short interest of 3.47% and a generous return of 36.16% over the past year, it’s been an appealing choice for investors. The forward price-to-earnings ratio of 13.19 is quite attractive, particularly as the stock is trading below its average price target of $17.33. Following the release of its Q3 2023 earnings report, the company has demonstrated consistency by meeting expectations. The surge in international market enrolments, notably in Mexico, aligns with the upward trajectory, benefiting from the country’s growing economy. While foreign currency rates have nudged the company to narrow its FY 2023 guidance, the projected year-over-year enrolment growth of 6% signals promising momentum. Despite concerns about a softening market in Peru, Laureate Education’s increasing enrolments underscore the resilience of its brand. Therefore investors may want to take a bullish stance on this stock.

Company overview

Established in 1989, Laureate Education operates within the education services industry, offering a range of higher education programs and services across the United States, Mexico, and Peru, encompassing campus-based, online, and hybrid learning models. This diversified business model has been instrumental in its revenue generation.

The company has strategically expanded its foothold in key markets like Mexico and Peru, yielding notable results that are evident in the robust new enrolment intake observed during Q3 2023, particularly in Mexico. This growth aligns with favourable macroeconomic trends, including the upsurge in Mexico’s GDP driven by heightened private consumption and early investments in near-shoring trends. Although Peru’s economic landscape may pose challenges, the company’s historical performance suggests resilience regardless of market conditions.

As the largest private operator of higher education in Mexico, Laureate Education’s strong performance and escalating enrolments position it for an upward trajectory in both top and bottom-line figures compared to FY2022. The upcoming major enrolment cycle slated for Peru in Q1 2024 signifies ongoing opportunities for growth despite temporary economic softness.

Financial overview

Laureate Education has showcased notable growth in its top and bottom-line performance, evidenced by its TTM financials. While the top line has displayed a consistent upward trajectory over the past four years, it remains below the levels recorded in FY2017. However, there’s a promising momentum observed in the TTM results, indicating positive strides forward.

During Q3 2023, the company reported impressive year-over-year growth, with a 20% increase YoY in revenue to $1.07 billion YTD and Adjusted EBITDA stood at $287 million, at a reduced margin YoY to 26.7%.

The quarter witnessed robust seasonal cash flow, with TTM cash from operations totalling $210.97 million. Additionally, the levered free cash flow of $72.3 million TTM, although notably lower than the previous fiscal year, remains positive. This indicates the company’s capacity to reinvest in its operations, settle debts, and reward shareholders, exemplified by the recent announcement of a special cash dividend of $0.70 per common share.

Laureate Education maintains a robust balance sheet, closing September with $131 million in cash against $135 million in gross debt, positioning the company with a mere $4 million net debt. Notably, the refinancing of the corporate revolver, extending its maturity through September 2028 while aligning its commitment size with the organisation’s post-transformation needs, highlights the company’s strategic financial management.

Valuation

As indicated by Seeking Alpha’s Quant rating, Laureate Education showcases an undervalued position, boasting a forward price-to-earnings ratio of 13.19—slightly trailing the consumer discretionary sector median of 14.82. Notably, the company has outperformed the S&P 500 index in the last year, signalling strong performance. Its growth prospects remain promising, primarily fuelled by a robust foothold in the buoyant Mexican market, benefiting from the country’s economic strength. However, there’s a cautious stance regarding its performance in the Peru market, prompting careful observation amidst the ongoing economic dynamics in that region.

Anticipating a growth of 12.05% in Mexico’s education market over the next five years is a crucial benchmark for estimating earnings growth. This projection is more conservative than analysts’ expectations of 15%. Using the discounted cash flow model based on this growth indicator, the calculated stock value per share is $18.41. Interestingly, this valuation exceeds the current market trading price of the stock, indicating a potential undervaluation and suggesting scope for upward growth. For potential investors, this difference presents an opportunity worth considering, highlighting the stock’s potential for future appreciation.

Risks

Investors should take note of the company’s downward adjustment in its FY 2023 guidance attributed to weaker foreign exchange rates, particularly crucial as a significant portion of its revenue streams originate from segments outside the US. While FX rates continue to demonstrate year-over-year benefits, the fluctuating currency dynamics pose an ongoing risk factor. Additionally, it’s important to acknowledge the seasonal nature of campus-based higher education, impacting revenue fluctuations throughout the year—a factor that warrants investor consideration.

Final thoughts

Laureate Education has shown resilience, yielding a commendable 36.16% return over the past year. Although it adjusted its guidance due to weaker foreign exchange rates, the company anticipates a 6% enrolment increase, signalling continued growth. Its stability in Mexico and adaptability in markets like Peru make it an attractive investment. However, potential risks include foreign exchange fluctuations and the seasonal impact on revenue due to campus-based education. Therefore investors may want to take a bullish stance on this stock.