price target of $30 title - citron research · bluto goes back to college 8 ... journal of nursing...
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Price Target
© Copyright 2019 | Citron Research | www.citronresearch.com | All Inquiries – [email protected]
Structural Change Without Legacy Customers Has (LOPE) Falling off a Cliff
Price Target of $30
Citron Research has successfully analyzed for-profit education over the past 10 years despite being contrary to Wall St consensus, namely Citron correctly predicted the 90% crash in the stock price of then Wall Street darling Apollo Group. More recently, Citron was ahead of the curve in our analysis of TWOU which is currently trading down 85% from its high and 60% from our coverage.
Introducing Grand Canyon Education
Citron believes that management of Grand Canyon has been both incompetent and deceitful in its ability to transform the school to adapt to the rapidly changing for profit education space. LOPE management spent many years focused on building a local Arizona campus that offers an “affordable Christian education” along with continuing a legacy online school.
However, last year Grand Canyon University became Grand Canyon Education with a promise of transforming the business model….and that is where it stopped.
Management has failed to deliver on any of the promises of innovation to Wall Street and it has finally caught up to them
Last month, online education powerhouse TWOU discussed the surprisingly rapid adoption and mainstreaming of online education from which there is no escape, and which will send LOPE stock down 70% in the next 18 months.
The reason the share price is continue to fall is once the business turns, and it probably has, LOPE does not have a durable revenue base to depend on . Even their happiest of customers leave them every 2.5 years.
GCE is surrounded with no way out
Background
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OPM, online program managers, are companies that provide technology and other solutions to help educational institutions create and operate online programs. Over the past five years, OPM’s have taken almost all of the nation’s universities online in return for a percent of revenue. The most well known of these OPM’s is TWOU (2U) whose stock was a Wall Street darling since its IPO. The role and saturation of the OPM is best defined in Aug 2019’s The Atlantic.
In becoming corporate move from Grand Canyon Univ. to Grand Canyon Education, LOPE CEO Brian Mueller has told Wall Street for the past three years that GCE was positioned to be a leader in OPM and educational servies that go beyond their 1 client of themselves.
On almost every conference call for three years, CEO Mueller continued his promotional commentary while selling enough stock to make him the highest paid university president in the country… more than every Ivy League president combined.
The Move to OPM
3
Q2’17: “We've had some pretty high-profile interest - high profile
institutions expressing interest.”
Q2’18: “GCE as a provider that has been able to support over 90,000 GCU
students, and is therefore, well positioned to support additional partners in the future.”
Q3’18: "We continue to work at the process of adding new GCE clients. In
the next 30 days, we will meet with 5 universities to discuss the possibility of a future partnership.“
Q4’18: “GCE will continue to work to gain additional university partners.”
Q1’19: “GCU will continue to work to gain additional university partners.”
Q2’19: “We are working hard. We have been on the road for 2 months now,
and we're going back on the road next week for additional meetings with 3 potential partners, which will be -- we're down the road with all 3.”
The next 2 slides compare the customer wins of 2U VS Grand Canyon Education
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2U Partnerships
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LOPE - Partnerships
5
THIS PAGE WAS INTENTIONALLY LEFT BLANK
Despite All CEO Mueller’s Promises,
LOPE Has Yet To Win Even One Outside Client.
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The Door Has Now Closed on LOPE
6
On July 31, TWOU’s stock was down 65% sending it down 90% from its 52-week high, despite its incredible growth and diversified partnerships.
For such a drastic move in a stock, one would think that either fraud, restatements, or loss of a key customer had occurred.
“There are now many more offerings and
more competition to enroll students.. This mainstreaming of online education means
increasingly regional competition. While
brands still won, they win in smaller circles of dominance. Regional bias impacts
enrollment decisions”
2U CEO - Christopher Paucek
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None of that happened. Instead the TWOU CEO spoke about the future of online education which has now become mainstreamed, saturated, and regionalized and growth and enrollments per school will be forever changed.
What We Learned From 2U Conference Call
7
The passive investment community that owns stock in Grand Canyon Education obviously has not read the two takeaways that discuss structural change that is about to send LOPE stock down 70%....that is the nature of passive
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And more importantly we learn..
1. Dreams of Grand Canyon Education’s plans on becoming an OPM powerhouse or let alone getting an OPM client of scale are gone. Before LOPE was even able to get 1 outside client, TWOU has just warned us that the market for university partners has become saturated and commoditized and schools are starting to bring more programs in-house while restructuring profit sharing agreements for flat fees -away from the traditional revenue sharing OPM model.
2. Grand Canyon’s legacy business and cash flows will be if not already under serious strain as students will choose online offerings from their regional universities and colleges over Grand Canyon University. This will be explained in the next 2 case studies. Case study 2 refers to LOPE’s Orbis acquisition dependence on growth in the online nursing sector.
2U Inc. Q2 2018 Results Earnings Call Transcript
Bluto Goes Back To College
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• In 2014, Bluto from Kalamazoo wants an online education after his stint at Faber College didn’t go so well. (After all fat drunk and stupid is no way to go through life)
• His choices are University of Phoenix, Grand Canyon, Bridgepoint, and a host of other niche players in the distance learning space. He searches Google, does some research and makes a decision.
• In 2019 and forever going forward, Bluto from Kalamazoo can choose between any of these familiar legacy and branded regional schools to attend:
• Western Michigan (local bias)
• Eastern Michigan
• Central Michigan
• University of Michigan
• Michigan State University
Bluto Wants to Be a Nurse
9
Bluto from Kalamazoo wants to become a registered nurse through online education
5 years ago Bluto might have used Grand Canyon University or one of the many other online schools. But through the OPM model online nursing has become MAINSTREAM AND REGIONAZLIED.
In the past 2 years Bluto can now choose to get an nursing degree from local institution which his patients might find to be more recognizable. Look how the landscape has changed in just 2 years.
2017 Western Michigan launches online nursing2017 Eastern Michigan Launches online Nursing 2018 Central Michigan launches online nursing
The above is a sample and the list continues to grow for regional online nursing programs. Journal of Nursing Regulation stated From 2007-2016, there was a five-fold increase in the total number of for-profit nursing programs
More headwinds for GCU
It is obvious that Grand Canyon University will have to work hard to survive let alone grow.
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Arizona State has become what GCU promised- The Sun Devil Wins.
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While LOPE CEO Brian Mueller was selling stock and building his low cost non -profit Christian University, across town Arizona State president
Michael Crow was acting like a Fortune 500 CEO by adjusting to the new realities of for profit education.
2019 US News and World Report ranked ASU as one of the top online universities and #2 in the country for bachelor's degrees
Note that GCU does not even appear on the list and would not even participate in US News Survey. But beyond the college rankings, the recent developments at ASU highlight how Grand Canyon is becoming a dinosaur in distance learning.
In 2019 ASU formed a partnership with former Laureate Education CEO Douglas Becker in the formation of Cintana Education, a global education company that serves as an OPM at foreign universities. Just read the news from last month
This for-profit initiative is in addition to the partnership that ASU signed earlier this year with private equity powerhouse TPG to create InStride. This for-profit initiative connects employers with universities in workforce education
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The two key takeaways are looking at the success of the business of Arizona State are:
1. 50% of LOPE online/offline enrollment is from Arizona and surrounding states. What is Good for ASU is bad for GCU.
2. There IS a business in the evolution of online education even beyond OPM and LOPE is not in any of it. While ASU
finds new revenue streams, LOPE is babysitting its dinasour.
The Sun Devil Wins – continued…
11
The ASU case study is important not only because of their regional competition for same students but more important, but more it shows what a real CEO should have done for GCE. In his conflicting Mueller has proven that is a a better small Christian college president than corporate CEO https://president.asu.edu
“ASU has engaged in many bold partnerships, including with industry, and in the process has become a research powerhouse. These breakthroughs could only have been accomplished through the visionary leadership of the institution and the quality and support of the ASU faculty.”
CEO – Douglas Becker
Cintana Education
LOPE Might be Dead Already… SEC Should Investigate Immediately!
12
Moving costs to an off-balance sheet subsidiary is the oldest trick in the book. In a highly unusual move, GCU paid $875 million for the GCU campus and its assets through the issuance of a 7 year senior secured note.
Lope is not in the banking business kept the note to avoid tapping the public markets to help structure this deal as it would require increased disclosure.
What is GCE hiding? Citron believes GCE is stuffing GCU with expenses to inflate its own profitability and as a result bankrupting GCU. After thoroughly
reviewing LOPE’s filings, we discovered a MAJOR RED FLAG.
In LOPE’s 10-K filing, the company notes that: “Funding expectations for future
capital expenditures for GCU are $100 million for the year ended
December 31, 2019.”
However, LOPE’s latest 10-Q filing reveals that funding to GCU for CapEx is
$170 million in just the first 6 months of 2019.
Is GCE taking its own OpEx and booking it as CapEx for GCU?
If there is not a perfect explanation for these accounting shenanigans, LOPE is going to ZERO!
A Culture of Conflict.
13
But what shareholders should be MOST concerned about goes beyond potential for conflict for manipulation of financials but rather the dual role of Mueller as CEO of both entities.
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The corporate structure between Grand Canyon Education and Grand Canyon University is one that the SEC should investigate. GCE’s revenues are almost entirely from Grand Canyon University. Having a captive customer that is 90% of revenues with the same CEO and no “Chinese wall” does not pass the smell test.
In considering these statements, keep in mind that GCU has never paid a dividend to its shareholders. Second, GCU has invested more into its campus infrastructure and technology – $1 billion over a 10-year period – than it has made in after-tax profits during that time. Third, GCU has not raised tuition on its ground campus in nine years, which is unheard of in higher education.” Link to article
How is that line going to sound in the securities class action?
Is it discriminatory to care about your shareholders??? Also, LOPE shareholders DO NOT own this campus. This conflicting and power-hungry CEO wants to embrace small-town Christian values while being a greedy and deceitful CEO.
In defending his role as President of GCU he has stated
“ASU’s president has previously made inappropriate comments that GCU has a different value system and cares more about its investors than it does its students. Our track record since 2008 clearly refutes that discriminatory stereotype.”
As noted by former deputy undersecretary in the Obama administration’s Department of Education, Robert Shireman,
“No other university in the country has its CEO working for its contractor and for itself.”
Example - Last year 2U spent $85 mil on R&D. LOPE spent $0. Who took that expense charge?
2U CEO Preemptive Rebuttal (08/19 Earnings Conference Call)
14
Grand Canyon Education Rebuttal to Citron Argument is beyond proof that LOPE stock is headed to $30
CEO Brian Mueller made it his first order of business to discuss the TWOU blowup on the conference call. As we show in our commentary, CEO Mueller’s responses are deceitful and designed to fool passive investors and a complicit analyst base who has shown a history of “not analyzing”.
I want to begin by addressing the issues regarding 2U. They have been leaders in the OPM space, and we wish them nothing but the best going forward. However, I want to be clear about how the GCE strategy is different and why we believe we will be successful. Number one, the Grand Canyon University online strategy is the strategy being replicated throughout the country.
Whoa, your strategy is different, yet it is being replicated throughout the country without GCE earning a single dollar from replication. That is called a commodity that you are not even producing.
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Although this space is very competitive, Grand Canyon Education has some significant advantages. Number one, it has the world's largest and most comprehensive platform to deliver both academic and operational services to GCU and other partners going forward. For the same or very similar revenue arrangements, GCE will offer over twice as many services………
How can you have significant advantages and the most comprehensive platform, yet you have yet to sign a single outside client after 3 years of promises? Obviously, potential customer either do not like your offerings or worse do not like your brand ….regardless of offering.
Number two, GCE is already the biggest player in this space with 2,600 very experienced staff members serving over 80,000 students on a $200 million platform producing very favorable outcomes.
This line is completely intellectually dishonest. You are your only client. “biggest player” cmon.
Rebuttal – Cont…
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The next point is very important. GCE is not looking for many new partners with a lot of very small programs. We are looking for 3 or 4 partners that want to scale to approximately 5,000 students over a 5- to 7-year period. We want to make sure that our partners are differentiated based on either brand, geography or program mix.
You have been saying that for 4 years now (as chronicled in the Citron report)
Grand Canyon Education is providing services to Grand Canyon University's traditional ground campus, which has become a very unique asset. The GCU traditional campus is going to grow to over 30,000 students in the next 5 years. This growth is happening at very low tuition rates. This competitive advantage GCU ground enjoys is unique and transformative in higher education. $1.5 billion has been invested into the campus in the last 8 years.
Congrats, your $5 bil company is going to get 60% of 7k new students at a low tuition rate over the next 5 years. As a University president he should be proud, as publicly traded educational services CEO he should be embarrassed. BTW…shareholders don't own the campus so please don't rub it in their face
We agree there is a need for healthcare professionals, and we hope LOPE is successful. If Orbis hits all of management targets it can become is 10% of corporate revenue- a tic tac.
More importantly, analysis of the Orbis acquisition is as good as proof as you can get that LOPE is on its way to $30 and the change is happening NOW.
For that we will bring the same Bluto case study…..
Number three; the Orbis acquisition is a second very unique asset. While the rest of the country is rushing into the GCU online very crowded space, Orbis is uniquely differentiated. It involves ground classroom and laboratory infrastructure located in strategic markets combined with online delivery. There is a huge need for the health care professionals it produces and there is a significant positive value proposition for its graduates.
Where is LOPE in 18 months?
16
Citron believes the stock of LOPE will trade to $30 in the next 18 months. It is inevitable, the only variable is when management is going to start telling the truth about industry headwinds. While this might sound drastic to casual observers, note how fast the market turned on 2U – the recognized leader in the industry.
The only way Grand Canyon Education will survive the new norm is by lowering prices and lowering admission standards.
More importantly, the company should trade at a discount to other online educators because of its failure to innovate and its dependence on one customer.
LOPE price target – either way, LOPE is overvalued.
If you believe that LOPE should be valued as a for profit education business, then applying APOL’s takeout multiple implies a stock price of $33 or 72% downside. If you believe that LOPE should be valued in-line with OPM industry leading TWOU then this implies a stock price of $28 or 76% downside.
Do Not Rely On Wall Street Analysts
17
Don’t look to any Wall Street sell-side analyst for answers. Not one predicted the imminent commoditization of online education. It is amazing that despite having insight into the industry no analyst was brave enough to discuss the commoditization of education.
Just six months ago, the same analysts that are bullish on LOPE today had a consensus price target of $88 on TWOU before it plunge to $14. Crickets
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Conclusion.
18
The worst investments over the past 5 years have been companies who are victims of secular forces. In this case of LOPE management took that time to sell stock and deceive Wall Street instead creating of innovation and change.
Trying to model LOPE next 5 years on past 5 years is worse than trying to model Blackberry sales after the IPhone by lazily looking backwards. At least Blackberry had loyal customers who did not want change and let the business slowly die. The need to replenish your complete customer base every 2.5 years is death to LOPE business in the changing environment.
In order to keep just a stock price of $30 LOPE will be forced to accept a lower quality of student as they are being attacked on a national and regional level.
If you are reading this report, Citron will almost GUARANTEE that whatever school you attended has an online component that probably did not exist 7 years ago.
2U has blown the whistle on the for-profit education industry and Citron expects in the next 18 months the stock of Grand Canyon Education will blow chunks like a creampuff from young Bluto.
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Unexpected Appendix to Report
19
After completing research for this report, this writer took time to check his Facebook account. What I saw validated the
complete thesis behind the report. Almost every ad served was either a regional educator like USC , Pepperdine, or Berkley or anational brand like MIT.
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