Among the biggest winners in Thursday's early trading are
K12 Inc. (
LRN
)
and
Equinix (Nasdaq: EQIX)
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A controversialbusiness model -- with robust growth
metrics
Anyone involved in public education has surely been hearing about
K12 Inc.
This company has developed an academic curriculum -- for
home-schooling and charter schools -- that has led to the diversion
of government funds away from public schools and toward its private
schools. That's been widely opposed among groups that feel that
public schools are bound to suffer as they lose incremental
funding. The company was even the target of a The New York Times
article in December 2011, when the newspaper questioned the
company claims of superior academic outcomes.
K12 and its supporters claim that the company delivers the best
of both worlds: A better education at a lower cost. "Evidence
suggests, year after year, virtual schools using the K12 curriculum
continue to outperform on state test results, academic performance
improves with tenure and more students are being accepted to
top-tier colleges like Cornell, Princeton, Berkeley, Stanford,
Michigan and Duke," note analysts at Barrington Research.
Meanwhile, the company, through a higher use of software, claims
that its program's costs are roughly 30% to 40% less per student to
administer than traditional public K-12 classrooms.
Even as the debate rages, K12 continues to grow at an impressive
clip. On Wednesday evening, Sept. 12, the company released fiscal
(June) 2012 results that showed a 36% jump in revenue (to $708
million) and a 30% increase inEBITDA (to $87 million). Various
metrics for the fiscal fourth quarter were also handily above
consensus forecasts, givingshares a big lift this morning. The
company now has more than 100,000 students enrolled -- either in
"virtual classrooms" or in its network of charter schools. (We'll
have to wait until early October to hear what management expects to
generate in the currentfiscal year ).
Despite Thursday's gain, shares are well off the52-week high of
$37, in part on concerns that regulators are still unsure of the
company's claims. (For example, shares had just tumbled more than
10% on Tuesday when reports circulated that Florida was opening an
investigation.)
That concern aside, Merrill Lynch sticks with a "buy" rating and
a $27price target , noting that K12 has "significant top-line
growth potential without taking into account expansion into new
states."
Equinix's clever move
Would that we could all be called REITs (real estate investment
trusts). That's the refrain being said in corporate boardrooms
across the land after watching Internet traffic manager
Equinix
pull off stunning gains on just such a move. The company announced
in early July that it was contemplating becoming a REIT -- which
reaps huge tax savings -- and its shares went on to surge from the
low $160s to above $200 (before a recent pullback). Well , Equinix
has just confirmed that the move will take place, spiking its
shares more than 8% this morning to around $202.
REITS pay notaxes at the corporate level and instead pass on any
tax liabilities to investors, avoiding the dreaded "double taxation
" when it comes to investing (when corporate income and then
personal capital gains are taxed).
Prior to the early July musings about a REIT conversion, Equinix
was valued at $7.8 billion. Now, the company is worth $10 billion.
In effect, the shift in its corporate structure has given this
stock a quick 28% boost. How long before other companies announce
their own REIT conversion plans?
Action to Take -->
K12 is an intriguing business model, but it's wisest to wait and
see if Florida more deeply investigates the claims that the company
used uncertified teachers in certain classes. The company denies
the claim, though you need to let a little time pass to see how
this plays out.
Shares of Equinix have risen from $40 in early 2009 to a recent
$210. Analysts have always gushed about this business model, but
even they are hard-pressed to justify higher price targets at this
point. After all, this stock now trades for more than 50 times
projected 2013 profits. Instead of Equinix, it pays to start to
look for other companies that hint out loud about a REIT
conversion.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.