Lincoln Education: What Q3 2020 Tells Us About Medium- And Long-Term Prospects

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In my last article on Lincoln Educational Services Corporation (LINC), titled: Lincoln Education: A Strong Medium-Term Play That Could Become An Even Stronger Long-Term Holding, I outlined some key reasons for my titular thesis. Many of these factors still hold good, but there are even more indicators of strong medium-term capital appreciation now that Q3-20 earnings are out. After briefly summarizing the indicators discussed in the previous article, I will look at the most recent figures that point to medium-term growth that could eventually make LINC a solid long-term holding.

Summary of Q2-20 Growth Indicators and External Factors

In my earlier article, I identified the following as key indicators of future growth in the medium term:

  • Education is a lucrative business during periods of high unemployment, with postsecondary education offering the most growth.
  • Lincoln offers a range of courses aimed at jobs that are considered “essential” per the U.S. Department of Homeland Security.
  • A significant portion of unemployed adults in the U.S. will be looking to ‘upskill’ themselves for more recession-resilient jobs.
  • Lincoln had transitioned to a hybrid model of on-ground and online training for its students under a temporary license to provide online courses, giving it a lighter operating expense load.
  • The company has been on a recovery path for the past three years that has sustained through two very challenging quarters of the fiscal year 2020 (three including Q3-20.)
  • Q2 ‘student starts’, a key metric, was reported at +15.2% over the prior period, primarily driven by an 18.8% increase in starts in the HOPS or Hospitality and Other Professional Services segment.
  • The overall student population grew by 7.5% excluding leaves of absence.
  • All 22 campuses were open by the end of Q2.
  • The company posted a net income in Q2, a rarity in typical second-quarter profitability trends.
  • The CEO pointed out that the student population could ramp up faster during the current recessive period as compared to growth during the Great Recession.
  • At the end of Q2-20, the company had a liquidity position of $11.5 million and $3.9 million in operating cash flow, and debt was down by $7 million.

In the final section of my analysis, I pointed out that the then-current price of $6.85 still represented a ~9% upside “even if FY-20 figures are in-line.” Now that the company has reported a GAAP earnings per share figure of $0.08 to beat analyst estimates by a three-cent margin, let’s look at how the points of my analysis from the last quarter segue into further indicators from Q3-20.

Q3-20 Shows Growing Strength

Since my last article, which was published on September 10, the stock declined more than 30% to under the $5 mark as of November 1. However, there has been a fairly strong rally since then. I attribute the decline and the subseguent rally to the market’s initial fear of a prolonged pandemic, and then a recent positive sentiment settling in after the company released its student starts figure for Q3-20 three weeks ahead of the earnings call. As of this writing, the stock is trading at around $5.65, which actually gives it a much bigger upside than when I wrote the previous article. We’ll get back to that later on in the article.

In Q3-20, the student starts trend was much stronger in the Transportation and Skilled Trades segment – at 17% – than in the HOPS segment, which came in at 11%. The overall preliminary figure was reported at +15% over the prior period, which helped the stock rally through the first half of November.

A further rally was seen after Q3 results saw the company beating analyst estimates at the top and bottom. Revenue was higher by nearly $5 million and EPS higher by 3 cents against consensus estimates. Revenue for the quarter came in at 8.5% higher, while student starts showed a 15.3% increase, both over the prior period.

Source: The New York Times

Across the board, Q3 metrics have been impressive despite the second wave of the pandemic literally straddling the quarter in question (marked with a red line on the above graph of daily infection rates in the U.S.)

Average student population rose by 8.1% during the period, driven by strong student starts. In addition, there was a considerable reduction in the number of leaves of absence, which numbered 700 in Q2-20. The company still has some deferred revenues – $0.4 million – on its book from graduation dates being delayed due to restricted access to classroom labs and externship sites, but the situation seems to have improved on a seguential basis. These revenues are expected to be recorded in Q4-20.

Operating income for Q3-20 grew 79.2% over the prior period, primarily driven by higher revenues for the quarter. The company was able to limit operating expense increases to achieve greater profitability. Lincoln was also able to pay down a significant amount of debt, which greatly reduced its interest expense and allowed the company to post a net income of $3.5 million, which is where the EPS beat essentially came from. Debt at the end of Q3-20 was down by $8.8 million to $18.3 million. The company has a strong liquidity position of $37.1 million, a cash balance of $9.9 million net of short-term and long-term borrowings, a net debt balance of $1.5 million, and an additional $21 million to dip into in its credit facility if required.

Investor’s Angle

With a much stronger financial position and continued healthy growth in key metrics between Q2 and Q3, as well as Q3 compared to the prior year, it’s quite surprising to see that the market still has its doubts about LINC and its future performance. Much of that doubt, one can assume, arises from prevailing economic conditions, the uncontrollable increase in daily infection rates, and fears that we’re still several months away from a COVID-19 vaccine being widely available to the public. Although further stay-at-home orders and lockdowns are improbable at this point due to the palpable tension around states announcing any more restrictions, I believe the market is overly cautious about this stock for some unsubstantiated reason.

To me, that’s as clear a signal for long-term investors to make their move as we’re likely to see. At the as-of-writing price of $5.65 and a median price target of between $8 and $9 on the conservative side, there’s an upside percentage of between 40% and 60%. Not a bad deal – just sitting there waiting for someone to take that money.

Moreover, at this point, the risk is also minimal. The stock might not surge right away considering the current market sentiment, and we could still see some downward pressure in the short term, but the metrics are strong and there’s historic evidence to show that the company prospers on the heels of a recessive period.

As such, the positive pressure building up underneath the stock will eventually be released, taking the stock to what I believe will be very close to or possibly beyond the highs above $15 that it enjoyed during the 2010-2011 period. I’m confident that such a story will unfold over the next one to two years that will subseguently set Lincoln Educational Services up for even longer-term success.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.