Rating Update: Stock Rating C-Neutral (5/16/19)-Adtalem Global Education Inc (ATGE).

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BUSINESS

Adtalem Global Education Inc. provides educational services worldwide. It operates through three segments: Medical and Healthcare, Professional Education, and Technology and Business. The Medical and Healthcare segment operates Chamberlain University, which provides a pre-licensure bachelor’s degree in nursing at 21 campus locations and post-licensure bachelor’s, master’s, and doctorate degree programs in nursing through its online platform; and operates medical and veterinary schools, including American University of the Caribbean School of Medicine, Ross University School of Medicine, and Ross University School of Veterinary Medicine.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, ATGE is expected to continue to be an important Value Builder.

ATGE has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects highly consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. ATGE has a neutral Appreciation Score of 53 and a neutral Power Rating of 57, triggering the Neutral Value Trend Rating.

ATGE’s stock is selling well below targeted value. The current stock price of $43.69 compares to targeted value 12 months forward of $59.
This neutral appreciation potential results in an appreciation score of 53 (47% of the universe has greater appreciation potential.)
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ATGE has a Power Rating of 57. (This neutral Power Rating indicates that ATGE’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: earnings estimate behavior for ATGE has been slightly favorable recently; and recent price action has been neutral. An offsetting factor is is in a slightly weakened position current.

INVESTMENT PROFILE

ATGE’s financial strength is high. Financial strength rating is 86.
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Relative to the S&P 500 Composite, Adtalem Global Education Inc has moderate Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that ATGE is normal risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low historical growth, and high earnings variability. ATGE’s valuation is moderate: low dividend yield, moderate P/E ratio, and low price/book ratio. ATGE has unusually low market capitalization.

CURRENT SIGNALS

ATGE’s current operations are strong. Return on equity is rising, reflecting: widening pretax margins; rising tax keep rate; and rising leverage.

ATGE’s current technical position is very weak. The stock price is in a 6.1 month down move. The stock has declined 17.8% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

The stock is currently rated C.
Adtalem Global Education Inc (NYSE: ATGE) stock closed at $1.68 on 5/16/19 after a major increase of 27.3%. NORMAL trading volume accompanied the advance. The stock has declined -1.5% during the last week and has performed in line with the market over the last nine months.

CASH FLOW

In 2018, ATGE generated a very significant increase in cash of +$180.1 million (+71%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$277.9 million. Non-operating uses consumed -$13.9 million (-5% of EBITDA). Cash taxes consumed -$89.7 million (-32% of EBITDA). Withdrawal of investment from the business totalled +$114.6 million (+41% of EBITDA). On a net basis, debt investors furnished +$154.9 million (+56% of EBITDA) while equity investors withdrew -$263.7 million (-95% of EBITDA).
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ATGE’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Adtalem Global Education Inc Peer Group. (Since 2016 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, ATGE was in the lower quartile and second quartile. Currently, ATGE is below median at -5% of EBITDA (-$13.9 million).

ATGE’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Adtalem Global Education Inc Peer Group. In most years, ATGE was in the third quartile and top quartile. Currently, ATGE is lower quartile at -32% of EBITDA (-$89.7 million).

ATGE’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Adtalem Global Education Inc Peer Group. In most years, ATGE was in the third quartile and top quartile. Currently, ATGE is upper quartile at +41% of EBITDA (+$114.6 million).

ATGE’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Adtalem Global Education Inc Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, ATGE was in the top quartile and second quartile. Currently, ATGE is upper quartile at +56% of EBITDA (+$154.9 million).

ATGE’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Adtalem Global Education Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, ATGE was in the second quartile and third quartile. Currently, ATGE is lower quartile at -95% of EBITDA (-$263.7 million).

ATGE’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Adtalem Global Education Inc Peer Group. In most years, ATGE was in the third quartile and top quartile. Currently, ATGE is upper quartile at +65% of EBITDA (+$180.1 million).
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ATGE’s Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Adtalem Global Education Inc Peer Group. In most years, ATGE was in the third quartile and second quartile. Currently, ATGE is substantially above median at +35%.

PROFITABILITY

ATGE’s return on equity has eroded very significantly since 2009 but it experienced a very sharp recovery after the 2016 low.
This very significant erosion was due to very strong negative trend in pretax operating return and strong positive trend in non-operating factors.
The productivity of ATGE’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend that accelerated sharply after the 2016 level.
Reinforcing this trend, pretax margin experienced a strong overall downtrend even as it experienced a very sharp recovery after the 2016 low.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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ATGE’s return on equity is upper quartile (12.9%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is substantially above median (7.5%) reflecting asset turnover that is above median (0.57X) and upper quartile pretax margin (13.1%).
Tax “keep” rate (income tax management) is upper quartile (112.2%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is below median (1.53X).

GROWTH RATES

Overall, Adtalem Global Education’s growth rate has slowed considerably in recent years.
Adtalem Global Education’s historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been -1.3% per year. (More recently it has been -6.0%.)

Total asset growth has been 6.1% per year.

Annual E.P.S. growth has been -4.0% per year.

Equity growth has been 5.7% per year. (More recently it has been 0.3%.)

Adtalem Global Education’s consensus growth rate forecast (average of Wall Street analysts) is 12.5% — substantially above the average of the historical growth measures.
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Relative to the Adtalem Global Education Inc Peer Group, ATGE’s historical growth measures are consistently third quartile. Revenue growth (-1.3%) has been substantially below median. Total asset growth (6.1%) has been below median. E.P.S. growth (-4.0%) has been substantially below median. Equity growth (5.7%) has been below median.

Consistent with this pattern, consensus growth forecast (12.5%) is also at the lower quartile.
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PRICE HISTORY

Over the full time period, Adtalem Global Education’s stock price performance has been variable and significantly below market. Between July, 2008 and May, 2019, Adtalem Global Education’s stock price fell -23%; relative to the market, this was a -66% loss. Significant price moves during the period: 1) March, 2016 – November, 2018: +234%; 2) November, 2014 – March, 2016: -65%; 3) August, 2012 – November, 2014: +153%; and 4) July, 2011 – August, 2012: -69%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 3.6% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through April, 2019 of 3.6% is substantially below median relative to Adtalem Global Education Inc Peer Group.

Current 5-year total return performance of 2.6% is lower quartile relative to the S&P 500 Composite.
Through April, 2019, with lower quartile current 5-year total return of 2.6% relative to S&P 500 Composite, ATGE’s total return performance is below median relative to Adtalem Global Education Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, ATGE’s overall valuation is quite low. The highest factor, the ratio of enterprise value/assets, is below median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/earnings ratio is near the lower quartile. Ratio of enterprise value/revenue is near the lower quartile. The lowest factor, the price/equity ratio, is lower quartile.

Relative to Adtalem Global Education Inc Peer Group, ATGE’s overall valuation is quite low. The highest factor, the ratio of enterprise value/revenue, is slightly below median. Ratio of enterprise value/assets is slightly below median. Price/equity ratio is at the lower quartile. Ratio of enterprise value/earnings before interest and taxes is at the lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
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ATGE has a minor value gap compared to the median valuation. For ATGE to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.98X to 2.08X. If ATGE’s ratio of enterprise value/revenue were to rise to 2.08X, its stock price would be lower by $2 to $46.
For ATGE to hit lower quartile valuation relative to the Adtalem Global Education Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.98X to 1.19X. If ATGE’s ratio of enterprise value/revenue were to fall to 1.19X, its stock price would decline by $-17 from the current level of $44.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, ATGE is expected to continue to be an important Value Builder.
Adtalem Global Education’s current Price Target of $59 represents a +35% change from the current price of $43.69.
This neutral appreciation potential results in an appreciation score of 53 (47% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 53, the neutral Power Rating of 57 contributes to an Value Trend Rating of C.
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Adtalem Global Education’s current Price Target is $59 (+19% from the 2018 Target of $49 and +35% from the 05/16/19 price of $43.69). This slight rise in the Target is the result of a -5% decrease in the equity base and a +25% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 14.0% — slightly above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2010 peak of 22%.

PTR’s growth forecast is 3.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2010 and 2018. The current forecast is significantly below the 2011 peak of 23%.

PTR’s cost of equity forecast is 7.4% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, steady decline between 2010 and 2018. The current forecast is below the 2011 peak of 12.1%.
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At Adtalem Global Education’s current price of $43.69, investors are placing a negative value of $-3 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 1.0% per year, and a return on equity of 11.2% versus a cost of equity of 6.5%.
PTR’s 2020 Price Target of $59 is based on these forecasts and reflects an estimated value of existing assets of $48 and a value of future investments of $11.

About John Lafferty 40696 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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