Lincoln Education Services: Joining a class rally
Lincoln Educational Services Corp. (Nasdaq: LINC) has skipped this year’s rally in educational services, floundering as others took turns at the big dance. But an upswing in fall enrollments, sharper strategic focus and valuation mean Lincoln may now be ready for a spin of its own.
West Orange, N.J.-based Lincoln, with market capitalization of $361 million, provides degree and diploma opportunities for high school graduates and working adults. Its 37 campuses are known as Lincoln College of Technology or Lincoln Technical Institute, depending on the state—a branding strategy begun in 2006. Programs include automotive technology, health services, culinary arts, and spa and beauty. Although the company has expanded into new areas, automotive education remains its top draw, with 41% of the 17,167 students enrolled at the end of December. Average enrollment for 2006 was up 1.2% from 2005.
Lincoln has been quite the wallflower. Since going public in late June of 2005 near $20 per share, Lincoln has failed to keep up with its rivals and the S&P 1500 index. In the past year, Lincoln’s shares have lost 20%, compared with the school industry’s gain of 43% and the index’s 16%. Year-to-date, Lincoln has struggled with a 4% loss, compared with advances of 52% for the industry. Shares settled Tuesday at $14.15.
That’s underperformance. Just in early August, Lincoln flunked three schools that were not meeting financial expectations. The three, from widely different geographic areas, are to be closed, with Lincoln taking a $0.07 per share impairment charge against goodwill. Management blamed the competitive post-secondary school environment.
The charge resulted in a $0.07 per share loss in the second quarter ended June 30, down from a gain of $0.04 per share in the year-ago quarter. Revenues, including acquisitions, were up 1.2% to $76.3 million. But on a same-school basis, sales declined 1.6%. That decline reflected a 5.1% drop in all-important student numbers, which ended at an average of 15,994 for the quarter.
Chalk one up for buying the bad news. The school closings were taken as a positive by analysts, and the stock rallied from a close of $13.16 on Aug. 2 to a quick high of $15 after second-quarter results were released. “We view this announcement as a positive since the schools were likely unprofitable,” said Gary Bisbee of Lehman Brothers in a note after the closure announcement. “While the need to teach-out remaining students may be an expensive short-term process, it should position LINC for better long-term profitability and returns.”
In addition to rebranding and keeping close tabs on campuses’ profitability, Lincoln’s advertising and marketing effort plans have paid off in accelerated enrollment for fall.
Jeffrey Silber, analyst at BMO Capital Markets, noted after second-quarter results that June enrollment starts were up 14% year over year, and July starts were up 23%. These numbers bode well for starts in the third quarter and should lead to increases in enrollment fairly soon, he said.
Although Silber maintained a “market perform” rating on Lincoln shares, he added: “we are warming up to this name.”
More enthusiastic is Amy Junker, analyst at Robert W. Baird and Co. Junker maintained a “market outperform” rating on Lincoln after second-quarter results, noting the improved starts and “management’s proactive focus on rationalizing its asset base” by closing the three underperforming schools. Junker wrote in a research note that the three closed schools were in Lincoln’s health services sector; she continues to see the most potential in automotive and skilled trades, and online. She also views valuation as reasonable, and left her target price at $18.
Wall Street is increasingly impressed with the newly defined focus of the company. Shaun McAlmont, Lincoln’s president and COO who joined the company in 2005, has highlighted these strategies as improving recruitment, which has seemed to pay off in the improved starts numbers for fall, emphasizing marketing, and expanding Internet programs, where many experts see the most growth potential for the industry as a whole.
Lincoln has approached its marketing and branding by bringing its various campuses and acquisitions under the Lincoln umbrella, as well as by launching a new website. It plans to start new programs, including criminal justice and is expanding other programs onto additional campuses. This summer marked the start of an Internet and cable ad campaign, which is hoped to attract sales leads into 2008, according to Junker.
In addition to online programs in network communication and information systems, Junker says Lincoln in the second half of 2007 expects approvals for online graphic design, web design and computer-aided drafting with December start dates. Online associate and bachelors degree programs in construction management are scheduled for launch in late 2007 or early 2008.
Still, Lincoln is a work in progress. Management maintains that competition has hurt revenues, as has an economy that offered potential students plenty of immediate employment opportunities. As a counter-cyclical industry, an attractive job market makes prospects less inclined to pay for education.
Many maintain that megatrends are positive for career schools based on population growth and momentum toward a service economy. But S&P analyst Michael Jaffe writes that slowing growth in the mid-30s age demographic—a big user of adult education—more competition and closer regulatory scrutiny have slowed growth in the past few years. Jaffe said he sees the industry recovering modestly in the coming year.
As Lincoln tries to reverse fortunes, others have passed it by, leaving Lincoln with attractive valuation. Career Education Corp. (Nasdaq: CECO) carries a P/E of 29 based on current year expectations; Universal Technical Institute, Inc. (NYSE: UTI) has a P/E of 26 and Corinthian Colleges, Inc.’s (Nasdaq: COCO) P/E is 39. Lincoln is at 24 times expected 2007 earnings of $0.58 and 19 times the 2008 consensus of $0.77.
Whether Lincoln can join in its class rally depends on executing its plan to raise enrollment. The company is showing some moves, but so far it’s still stuck at the punch bowl.
