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Grand Canyon Education Moves To Top Of The Class

Posted
12/26/2012 3:55:00 PM
By: Investor's Business Daily
Referenced Stocks:APOL;DV;LOPE;STRA

Grand Canyon University 's ( LOPE ), nickname and mascot is the antelope. But just about everyone at the school calls themselves the 'Lopes.

That goes for the sports teams and investors in the stock of the parent company, Grand Canyon Education which trades under the ticker LOPE.

Both sides are on a roll. Shares have rallied 43% this year. Sports-wise, GCU was recently invited to join the Western Athletic Conference, meaning all 18 teams will compete in NCAA Division 1 competition, including men's and women's basketball, baseball, wrestling and soccer.

University President and CEO Brian Mueller called Nov. 27, the day the school accepted the honor, "historic." (The stock rose 4% on the news.)

Division 1 status "will raise our university's profile and illuminate the great things happening at Grand Canyon," Mueller said in a statement.

Phoenix-based Grand Canyon might be part of the beleaguered for-profit education sector. But it's not shrinking like many of its online-heavy peers such asApollo Group ( APOL ),Strayer Education ( STRA ) andDeVry ( DV ).

Analysts credit the appeal of a vibrant campus life, and the sports teams that go with it, as one main reason.

Government Crackdown

For-profit colleges have been impacted by the fed's crackdown on aggressive sales and recruitment practices. Also hurting enrollments are the online inroads made by not-for-profit state and community colleges, which have been expanding into their turf with lower tuition and higher brand recognition.

"Grand Canyon is facing the same problems as the rest of the industry," said BMO Capital Markets analyst Jeff Silber. "But it is growing for two reasons."

One reason is that it is becoming "a real school," he says. It has a sprawling campus in Phoenix, replete with dining halls, dorms and a 55,000-square-foot recreation and fitness center.

Capping it all off is the new $40 million, 5,000-seat Grand Canyon University Arena, which holds basketball games, concerts and other events.

More than 7,400 students take classes on campus, a number that has grown dramatically in recent years. "A few years ago it was less than half that size," Silber said.

A lot of Grand Canyon's nearly 45,000 online students, many of them working adults living in Arizona, often drop by for a taste of campus life.

Grand Canyon's campus has helped attract students to its online programs, analysts say.

"It is appealing to online students to know there is a 7,000-student campus sitting in Phoenix, Arizona," said Trace Urdan, analyst with Wells Fargo Securities. "Most other for-profit schools don't have traditional campuses. They are in office parks."

The 'Halo Effect'

What also sets Grand Canyon apart from other for-profit education companies is its Christian orientation. That and its campus create what Silber calls a "halo effect."

"It is a Christian school serving a target market that has been growing," he said.

The school was founded in 1949 as a Baptist college but eventually lost its way. In 2003, it was on the brink of bankruptcy, with only 1,500 students.

A corporate savior appeared: turnaround expert and Phoenix native Brent Richardson. He and an investor group acquired the school, made changes and in 2008 took the parent company public, raising $230 million.

Using proceeds from the IPO, a new era of growth began as the campus was expanded and classrooms renovated. Richardson remains a stakeholder in the company and its executive chairman.

Regionally accredited GCU is known especially for its programs in education, nursing and health sciences. It also offers graduate programs in various fields.

While costs to run a physical campus are much higher than for an online school, Grand Canyon leverages the administrative costs of the ground campus across all of its online students.

"If they were only operating a ground campus, they probably wouldn't be profitable," Urdan said. "But all of those online students are contributing to the overhead as well."

Grand Canyon's year-over-year earnings have grown in double digits or better for six straight quarters. In Q3, per-share profit jumped 41% to 41 cents, sending shares up 13%.

Revenue in the quarter rose 23% to $133.6 million as total enrollment grew 17.3% from the year prior to around 52,300 students.

Analysts expect earnings this year to rise 25% to $1.40 a share and grow 21% next year, according to Thomson Reuters. Revenue is seen rising 19% to $506 million this year and 12% next year.

Urdan says Grand Canyon's competitive pricing is also a factor in its appeal.

"They are far less expensive than other online schools," he said, "especially the University of Phoenix," operated by the larger Apollo Group.

Apollo's revenue and profit have plummeted the last few years. Its shares are 65% off their high.

Grand Canyon's published tuition rate is $16,500 a year, which is less than most private universities but higher than state universities in Arizona. After scholarships, however, the average paid by a student is $7,800 a year.

Though Apollo's University of Phoenix has a ground campus, it doesn't serve the typical 18- to 22-year-old undergrad as much as Grand Canyon, Urdan says. Rather, Apollo focuses on working adults, who rely more on federal loans.

Traditional undergraduates are known to get more financial help from parents, have lower default rates and typically stay longer until they graduate.

Grand Canyon's campus enrollment continues to grow and "demand is strong," Urdan says.

Management aims to grow the ground campus to 15,000 students by the fall of 2015.

But eastward expansion to a New England campus is off the blackboard. Management recently turned down a donation of a 217-acre former prep school in Northfield, Mass., after concluding the location was too remote and the costs for upgrading infrastructure too high. But they didn't rule out a second ground campus if the offer were right.

"Things are going so well in Arizona and the greater Southwest that we will continue to invest in this regional strategy," Mueller said in a conference call.