Adtalem Global Education Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Adtalem Global Education is a leading workforce solutions provider and educational company, focusing on healthcare and financial services fields, with a mix of professional and academic credentials.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Adtalem Global Education Inc. (ATGE) operates as a for-profit higher education provider with a focus on health care and financial services. It derives its revenues primarily from tuition fees, with the majority of students seeking professional credentials, rather than academic qualifications. Adtalem’s approach aims to provide flexible options to those looking to enter or advance in their careers. This also includes various career development and assessment offerings to employers.

Business Explanation:

Adtalem Global Education (ATGE) operates primarily through two distinct segments:

  1. Chamberlain University: Offers degree programs in nursing and healthcare, operating primarily through online and hybrid formats, which includes bachelor’s, master’s, and doctoral programs.
  2. Walden University: Provides primarily online education focusing on social sciences, public health, and other fields, emphasizing post-graduate programs leading to more advanced careers in those fields. Other operations also include medical and veterinary schools, most notably American University of the Caribbean School of Medicine, Ross University School of Medicine, and Ross University School of Veterinary Medicine. In all, ATGE has roughly 75,000 students enrolled in its programs.

ATGE has been undergoing a “transformational” process aimed at focusing on its highest value programs and better meeting student needs and market demands. This transition involved a number of restructuring actions, including consolidation of operating units and divestment in non-core assets, as well as increased spending on its best performing areas, mainly its online education programs. They have also recently focused on better data and analytics to support and improve enrollment numbers, something management has highlighted as a key driver of value.

Industry and Competitive Landscape:

The higher education industry, particularly for-profit institutions, faces a number of challenges, including scrutiny over student debt and default rates, and changing regulations. Competitive landscape is intense with both online and brick-and-mortar schools all vying for enrollments, each with varying degrees of reputation and price sensitivity.

  • Competition: ATGE faces competition from traditional universities, other for-profit institutions, and online education providers.
  • Industry Trends: The industry has seen increased demand for online and flexible learning options, particularly in healthcare. Also more pressure from the government to lower student debts. Regulatory landscape is evolving with a focus on outcomes and loan repayment rates.

Moat Analysis (Rating: 2/5):

Adtalem’s competitive advantage is limited and can be described as a narrow moat. Here’s a breakdown:

  1. Brand Recognition: While ATGE’s major institutions like Chamberlain and Walden have brand recognition, their level of brand strength and premium pricing power are not as pronounced as companies like some high-tech companies. This can be seen through the high rates of student churn and defaults.

  2. Regulatory Licenses: Some aspects of their operations, particularly their schools, require regulatory accreditations and approvals, which can deter other companies from entering, creating some level of a barrier to entry. Still, obtaining approvals is common in their sector.

  3. Switching Costs: They do have some switching costs (students usually want to complete their degree), and also some benefits that are associated with a reputable educational institution. However, transferability is becoming more and more of a topic.

Moat Rating Justification:

  • Given how high the competition is in their field (with a lot of universities all offering similar programs), with many private and well-funded companies that are also providing similar services, and with low switching costs, their moat is not very strong.
  • While certain aspects of their business create some sort of protection (brand, accreditations, switching costs), none of them seem very difficult to replicate for a well-funded company.
  • Most of their growth and performance are due to market forces that they have little control over.
  • With all this put together, it seems that their moat is not very strong and is only a narrow moat that could change in time.

Risks and Business Resilience:

  1. Regulatory Risks: Significant risks exist from regulations in the higher-ed field that could limit their practices or cause changes in the business. These risks include student debt forgiveness, Title IV program changes, and stricter federal oversight.

  2. Economic Risks: An economic downturn can lead to lower enrollments, higher default rates, and reduced spending on education.

  3. Competitive Risks: There is high competition with several players offering similar products, which means high advertising expenditure and customer acquisition costs, and the risk of being disrupted.

  4. Operational Risks: Operational risks such as low enrollments, higher costs, or not achieving their expected earnings are major risks to their profitability.

  5. Acquisition Risks: Given that acquisitions are a major part of their growth, any missteps in their acquisition process, in selecting good targets, in integrating their businesses, and in managing those businesses might create serious risk.

Financial Analysis:

  • Income Statement:

    • Revenues have shown moderate growth. From 2020 to 2022, they grew from around 1.2 billion to over 1.4 billion in revenues. In 2023 their revenue is above 1.5 billion. The key driver for the increase has been enrollment growth and organic improvements as well as acquisition.

    • Gross profit margins are relatively high, but the net profit margins are rather low. This is due to higher operating and acquisition costs.

    • Operating expenses have increased over time, which are mostly related to the heavy competition in the sector, and investments in new programs.
    • They have reported a net income of $67 million as of June 2022. In year ended June 30, 2023, net income came out at $114 million, showing improvement.
  • Cash Flows: Their cash flows have been pretty volatile in the last few years. This has been primarily due to acquisitions that have occurred in that period.
    • In fiscal year 2022, operating activities brought in $299 million, while investing activities took away $599 million, mainly on acquisition costs. Financing activities also brought in $357 million.
    • In fiscal year 2023, however, operating activities made $349 million, financing activities took out $208 million, and investing activities took out $42 million.
  • Balance Sheet:

  • Their balance sheet is not as healthy as one would like, mainly due to their recent acquisitions, but is improving.

  • As of September 30, 2023, they had a debt of $1.36 billion and cash/cash equivalents of $437 million. This means a net debt of roughly $923 million.

  • Total equity is at around $1.2 billion with large amounts of goodwill, meaning that their value is not really based on tangible assets, mostly intangible assets.

  • Total liabilities are at roughly $3.2 billion. This shows high leverage on the company.

Financial Justification:

  • They have had a good revenue growth in the last few years, while their debt has increased massively due to a large amount of acquisitions.
  • With the new focus on higher-value programs, better utilization of data, and a larger student body, there is a chance that they may be a profitable endeavor in the next few years.
  • Net income has gone up from $67 million in 2022 to $114 million in 2023.
  • Still, their cash flows and profit margins leave to be desired, with huge amounts of expense every year.
  • The company will need to focus on its operational efficiency if they want to improve.

Understandability (Rating: 3/5):

The business model is fairly straightforward in that it provides higher education services to a wide range of students. However the specifics of the services and the dynamics of the company can take time to fully understand. For this reason it gets a 3.

Balance Sheet Health (Rating: 4/5):

  • Although their financial obligations are high, their current assets and liabilities are not extreme. This means that they can still service their debts in a timely manner. For this reason it gets a 4.
  • Their balance sheet is getting better from a health perspective, even if the company is heavily leveraged.

Recent Concerns/Controversies and Management’s Take:

  • Enrollment Concerns: A slowdown in student enrollment after the covid boom has led to some short-term pain, though management says they are back on track for improving enrollments.
    • Management has said that “The near-term decline we are experiencing in university enrollment is expected.”
  • Restructuring Actions and Divestitures: Recent measures for restructuring and divesting from certain parts of the company might lead to uncertainty, however, management seems confident that it was a good decision, focused on the highest value parts of their business.
  • The “focus is to streamline to where the company has the highest strategic advantages.”
  • Acquisition Concerns: Their strategy of heavy acquisitions might have led them to overpaying for certain assets, and it is unclear how profitable some acquisitions might become.
    • Management has said that it is now primarily “focused on the integration of recent acquisitions.” This might lead them to increase profitability if all things go according to plan.

Conclusion:

Adtalem is in the middle of a restructuring phase, trying to improve the quality of its offerings and financial standing. They are a solid educational provider that has been around for a good period of time, with very strong brand names. They are trying to take advantage of the current need for better access to higher education and career services. The future hinges on management’s ability to successfully navigate their operational issues, while improving their balance sheet and profitability. Their moat is fairly narrow and they are subject to many risks. Their recent improvements in earnings makes them look better, but there is still a lot of things they need to work on to achieve their goals.