A doctoral student studying diligently at her desk, the light of knowledge shining in her eyes.
US-listed Laureate Education (NASDAQ: LAUR) operates five universities across 50 campuses in the attractive markets of Mexico and Peru. It has a majority market share in offline and hybrid teaching modalities, with an average annual retention rate of 80% in the past five years. The institute focuses on academic disciplines across science, engineering, and business, presenting robust employment scope and high earnings potential for its 450,000 students. While Laureate generates revenue from private pay streams without government-sponsored student loan programs in the two nations, funding is facilitated by family savings, cash flow, and student salaries. The company boasts strong student outcomes, an average revenue per student of $3,400 annually, and a medical, dental, and vet school portfolio. It has showcased strong brand awareness and has the highest accreditations in Peru and Mexico. Here, we summarized a May bullish report published by LimitedDownside on Value Investors Club.
The thesis described LAUR as a high-return consumer business and based the bullish case on the company’s buyback program, growth opportunities not priced in by the markets, and management’s open-mindedness to organizational restructuring. CEO Eilif Serck-Hanssen has played an instrumental role in the company’s massive transformation over the years through efficient capital allocation and restructuring. The company has an under-levered balance sheet and trades at low earnings multiples. How Serck-Hanssen allocates capital in the future will depend on the share price: if it remains low, he could route FCF into buying back stock, whereas if shares trade at higher multiples, management is confident of acting on growth opportunities, given that the company expects to achieve 35% IRRs (post-tax) on campus expansions.
Serck-Hanssen was LAUR’s CFO from 2008 until his 2018 appointment as CEO. Eilif has 95% of his net worth invested in LAUR. He singlehandedly led the divestment of many LAUR assets and used the proceeds for stock buybacks and special dividend payouts. LAUR has prioritized investor relations in the past year after KKR’s exit in late 2022. Since becoming CEO, Serck-Hanssen LAUR has trimmed operations from 70 institutions in 25 countries and over a million students with $4.4 billion in revenue to two countries with 450,000 students and $1.5 billion in revenue. The company was recording negative FCF when Serck-Hanssen took charge. While the previous management made over 40 acquisitions to replicate the concept globally, their capital-constrained approach levered up the company to almost 7X as currencies didn’t favor them. Interestingly, management has been able to reduce capital intensity from around 9.5% between 2016-18 to almost 5%, while organic revenue doubled to nearly 10% in 2023. However, shares have only re-rated to 5.3X EV/EBITDA today from 4.5x EV/EBITDA in 2021.
Over the medium term, the downside is apparently safeguarded as company leaders are open to divesting assets if share prices remain undervalued. Several factors could keep share prices stunted relative to earnings, such as US investors viewing LAUR as a US for-profit education while emerging market investors associate LAUR with Brazilian higher education institutes, which have suffered due to regulatory changes and stiff competition from “distance learning” rivals. Furthermore, Laureate’s extremely high effective tax rates in recent years (54% in 2023) also curbed FCF conversion and possibly impacted the multiple. The cheap valuation can also be attributed to the higher cost of capital geographies, with the 10-year Mexican sovereign yielding 10.0% and Peru’s at 7.3%, much higher than the US. However, Laureate witnessed a 3% growth in student enrollments last year as markets in Peru and Mexico have a balanced supply and demand for higher education, relatively better student outcomes, a growing market, and pricing hikes almost in tandem with inflation.
In early 2023, LAUR management set an 8%-10%, 3-year compounded FX-neutral revenue growth and a double-digit FX-neutral EBITDA CAGR target. It also announced a neutral change in working capital and plans to achieve an effective tax rate of under 40% in the next three to five years. The thesis argues that these are decent financial metrics that deserve higher than a 6x EV / EBITDA-CapEx multiple. Although LAUR downgraded these estimates in the initial 2024 guidance due to Peru’s dire economic situation, there are already signs of improvement. Meanwhile, if the stock price stays muted in the next few years, management has indicated a willingness to sell assets, given that rates drop and lead to political stability in its markets for higher multiples. Laureate previously sold its network universities for between 9-15x EV/EBITDA, and the board might aim for an 8-10x EV/EBITDA multiple range as “fair value” for its Mexico and Peru assets. Furthermore, Point72/Cohen Private Ventures has almost a 10% stake in LAUR, and Andrew Cohen is vice chairman of the board, which can help unlock value. LAUR is also exploring nearshoring opportunities that are yet to be priced into sell-side estimates. The company is mulling Mexico expansion plans starting in 2025, as nearshoring remains a hot trend in Mexico, expected to create millions of jobs as the demand for upskilling the labor force remains high. While management is approaching this opportunity cautiously, given that it is a B2C company and this would be a B2B offering, LAUR may have an edge with solid branding and current operations.
There is a marked margin gap between Mexico and Peru, with Mexico trailing despite bigger operations since LAUR owns real estate in Peru, whereas it leases many properties in Mexico. However, there was substantial margin expansion in Mexico last year due to solid operating leverage. LAUR is also prioritizing operational efficiencies via restructurings like centralizing the back office, establishing a national academic office, and optimizing classroom sizes. Moreover, hybrid learning complements LAUR’s profitability with over 76,000 online enrollments. Pricing is cheaper for digital learning, and the company estimates releasing real estate worth hundreds of millions of dollars as it ramps up digital delivery. However, a Trump Presidency, higher tariffs on Mexican exports, or unfavourable regulatory changes remain potential headwinds for the company.
LAUR is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 28 hedge fund portfolios held LAUR at the end of the first quarter, which was 27 in the previous quarter. While we acknowledge the potential of LAUR as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as LAUR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.
Disclosure: None. This article is originally published at Insider Monkey.