Long time readers will know that Grand Canyon Education (LOPE) has been a core holding of my $100M fund for the last five years. Grand Canyon operates a beautiful 300-acre college campus ten miles north of downtown Phoenix. The school will enroll 17,000 ‘ground students’ next fall. It also has over 60,000 online students, most of whom are adult learners (over 21 years old) seeking to restart their undergraduate studies or pursuing certificates and master’s degrees in their chosen professions.
I first wrote about Grand Canyon nearly three years ago, just before I gave a presentation on it at the 2014 Ira Sohn Conference in San Francisco. LOPE was trading for around $43 a share at the time. I continued to write about Grand Canyon over the next two years, praising its impressive growth, smart management, and the quality education it provided. And yet, despite doubling its EPS and beating analysts’ estimates over a dozen quarters in a row, the stock barely budged. At the time of my last piece on the company, in April of 2016, LOPE was trading for … around $43 a share.
The main reason for LOPE’s persistently flat performance was that it was a very good stock in a very lousy neighborhood. The negative sentiment around the for-profit education industry—which is well-deserved for nearly every company in it, with the exception of Grand Canyon—kept investors from buying into what was one of the most impressive businesses I have ever come across in my three decades of money management.
It took until last fall for the markets to finally recognize Grand Canyon’s excellence. LOPE hit $80 last week, up roughly 100 percent over the last year and nearly 300 percent since my fund first entered the position. Nonetheless, I believe Grand Canyon remains one the best growth companies in America today.
One of Grand Canyon’s greatest advantages is that it competes with poorly run public and private universities. Grand Canyon makes a 31 percent operating profit margin while charging its ground students ‘only’ $17,000 for a full year of tuition, room and board. Most private schools charge at least three times that much, yet very few can even break even at those rates. Secondly, because LOPE has a Christian identification, its students are much more motivated to learn and less likely to engage in destructive personal behavior—and once they graduate, they pay back their student loans at a higher rate than alums at most public and private schools and nearly all for-profit universities (with the possible exception of Liberty University in Virginia).
Lastly, LOPE is striving to improve its academic reputation in order to compete with the best private and public US colleges. Incoming LOPE ground students have an average high school GPA of 3.5. Many are national merit scholars. And roughly half of them major in STEM subjects (science, technology, engineering and math), a much higher percentage than students at most public and private schools in America. Each year, more LOPE alums enter prestigious Ivy League graduate programs, as well.
In 2017, Grand Canyon should produce yet another year of double digit growth. Revenues will be almost $1 billion, and LOPE’s exceptional senior management believes EBITDA will exceed $300M for the first time. Because capital expenditures will be roughly $80M this year (down from almost $200M in 2016) LOPE’s cash will build. The most likely use for the capital will be a sizeable buyback authorization. While management is hesitant to invest in a ‘greenfield’ new campus, that could also be a possibility, though probably not this year.
Despite its incredible performance, a mere five analysts cover Grand Canyon, and most Wall Street research on the company fails to highlight its Christian orientation. That is a major omission. Lumping LOPE in with other for-profit schools like DeVry that have flat to shrinking revenues and are focused on a much less motivated student population is the reason so many folks missed out on this stock in the first place.