US Public Education: Insider buy-in adds to optimism for this turnaround

After a multi-year slump caused by what one sell-side analyst called a “value-destroying” acquisition, American Public Education (NASDAQ:APEI) has come back a lot in the last twelve months. In fact, over that time frame, APEI stock has easily outperformed other names in the space, with share values ​​tripling since last September.

Put that down to a successful turnaround that has allowed the company to return to steady profitability, leaving it poised to make even more major improvements in operational performance in the coming months.

That said, stocks have seen a more choppy performance of late. Shares dipped briefly last month after APEI’s latest earnings release, but in hindsight it’s clear that this it was an overreaction.

Much more runway remains, and there’s another factor at play (insider buying) that further suggests the opportunity for strong returns is still on the table, even for investors only considering the stock today.

APEI Stock: Background and Story Behind Its Post-Acquisition Decline

Based in Charles Town, WV, APEI owns and operates institutions focused on providing career-based higher education for working adults. In addition to the American Public University of the same name, APEI owns the following schools:

• American Military University (AMU): AMU is the largest provider of higher education for the US military.
• Hondros College of Nursing: Hondros is a for-profit nursing school that operates 8 campuses, primarily in Ohio, but with locations in Detroit, Michigan and Indianapolis, IN. APEI acquired Hondros in 2013.
• Graduate School USA: Created by the US Department of Agriculture more than 100 years ago, this career-focused public higher education provider was privatized in the late 2000s and acquired by APEI in 2022.
• Rasmussen University: Rasmussen, APEI’s aforementioned “unfortunate” acquisition target, is a healthcare and nursing education provider.

By and large, APEI’s acquisitions have helped diversify revenue beyond the educator’s legacy business of providing higher education to military personnel. However, while further diversifying the revenue streams of American public education, as I’m looking for Alpha commentator discussed earlier this year, APEI’s acquisition of Rasmussen proved “disastrous” not long after its completion in 2021.

In short, from 2021 to 2023, Rasmussen experienced a steady decline in enrollments, resulting in large losses for this operating segment, not to mention a costly discount to this acquisition. Not surprisingly, this deterioration in the company’s overall operating performance has sent APEI stock down from over $25 a share at the time of the Rasmussen deal to just over $4 a share last October:

However, in the months that followed, a material improvement in American Public Education’s fiscal results produced an extraordinary rally in the stock. Although very large gains have already been accumulated, there is likely to be an additional benefit for new and existing investors.

Even after the run-up, American public education is rated low

Starting in 2023, at the same time APEI’s stock was hitting record lows, the company began implementing a much-needed turnaround. By aggressively reducing costs at the Rasmussen segment, while at the same time stabilizing its revenue, beginning in Q4 2023, this has begun to result in improved fiscal results for Rasmussen and the company as a whole.

Already rebounding ahead of these results, strong Q4 2023 numbers, plus APEI’s “beat and lift” results for Q1 2024, led to continued strong gains for stocks in the first half of 2024:

However, starting in July, stocks began to stagnate. Then, in August, APEI’s Q2 2024 results sparked a negative reaction from investors, with shares plunging nearly 28% immediately after the earnings release. The company’s revenue and earnings rose year-over-year, but the results were below sales forecasts.

Since the earnings, however, APEI has climbed back to pre-earnings price levels. On closer inspection, the likely reasons for this are twofold.

Way back to $25 per share and beyond

So what are the two reasons why APEI stock has rebounded so quickly after the pullback after the earnings retraction? First, investors quickly realized that they had overreacted to the reported earnings and earnings miss. Even though the top and bottom rate was coupled with a downward revision to net income guidance for FY2024, American Public Education reiterated full-year revenue and adjusted EBITDA guidance.

Furthermore, it’s not as if American public education is priced as if the completion of its turnaround efforts is already factored into its valuation. That means, at current prices, APEI is trading at just 12.6 times 2025 earnings and 11.7 times 2026 earnings.

Compare that to the shares of other publicly traded for-profit college operators. For example, Grand Canyon Education ( LOPE ) trades at 18.1 times and 16.5 times 2025 and 2026 estimated earnings, respectively.

Strategic education ( STRA ), the parent company of Capella University and Strayer University, trades at 20.6 times and 17.2 times estimated 2025 and 2026 earnings, respectively.

With that, assuming the solid execution of America’s public education turnaround continues and results meet forecasts, it’s not a stretch to think that this stock could finally climb back above $25 a share, or what the stock was trading at at the time of the Rasmussen acquisition. A move to even higher prices could be in the offing if the company is able to deliver even stronger results than currently forecast.

In addition to the valuation factor, the aforementioned insider buying is also sparking renewed interest in APEI stock. As several commenters on X.com have notedboard member Michael David Braner has been piling up shares lately.

According to SEC Forms 4 compiled by Finvizas of August 8, this insider increased his personal position from 1.07 million to over 1.9 million shares. While it would be even better if C-suite members joined this post-earnings buydown, these trades help alleviate any concern that the latest results mark the beginning of the end for APEI’s bull case.

Enforcement and political risks with APEI

While this stock could only rise if the company continues operations and delivers further improvements in operating results in line with expectations, there are of course some risks that may affect the chances of this bull case playing out.

While another upside might not be fully factored into APEI’s valuation, given the intensity of the subsequent decline in earnings for the stock, if the company misses expectations when it reports its next quarterly results later this year, it could be more volatility. .

If American Public Education has to give up on expectations of improvement, the stock could enter another prolonged slump. After all, while cheap relative to potential future results, relative to current-year earnings, the stock is expensive at a P/E ratio of 36.6.

In addition to execution risks, there are also potential regulatory risks with APEI. A recent play in The Economist examines how much the results of the upcoming 2024 US presidential election could have on future regulatory control of the for-profit education space.

If Democratic nominee Kamala Harris, who successfully prosecuted for-profit colleagues engaging in illegal practices in her past role as California attorney general, wins the White House, that could lead to more uncertainty about the actions for-profit educational institutions, even if an increased crackdown on space is not a major policy priority.

I’m not saying that APEI and similar names will fall like private prison stocks did after President Biden’s election victory in 2020. I’m also not saying that the company could be directly at risk of regulatory scrutiny.

However, it is something worth considering as this factor can affect price performance in the short term.

Conclusion on American public education

While APEI has tripled its price from last fall and delivered a more choppy price performance in recent months, don’t assume the ship has sailed with this comeback game.

Recovering from its post-earnings hiccup in August, based on its low valuation compared to forward forecasts as well as insider buying, the stock could be on its way to retrace $20 a share before likely rising to $25 per share, or even higher.

Although execution risk remains, the risk/reward proposition remains favorable. Despite the political risks, consider that while a Democratic victory in November might bode ill, the opposite result will happen if the Republican Party takes the White House again.

With all of this in mind, consider APEI stock a buy at current prices.