National American University Holdings

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

National American University Holdings, or NAD, operates as a for-profit post-secondary education provider, focusing on career-oriented programs delivered online, on-campus, and through hybrid methods.

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.

Business Overview NAD operates in the for-profit post-secondary education sector, providing a variety of degree programs at the undergraduate and graduate levels. They offer courses through online, on-campus, and blended learning formats. Their programs are designed to cater to working adults seeking career advancement.

Revenue Distribution: NAD’s revenue primarily comes from student tuition fees, with variations depending on program type and enrollment numbers. Historically, the majority of their revenues came from on-campus tuition. However, online and hybrid education have been growing in recent years.

Industry Trends: The for-profit education industry has faced significant regulatory scrutiny, resulting in tighter oversight. There is also a broader shift towards online and flexible learning options, and an increased demand for career-oriented programs that provide job placement.

Margins: The education sector is not known for its large margins. Margins are susceptible to changes in enrollments, regulatory changes, and operating expenses. A notable portion of the revenue is reinvested into learning material creation, marketing and operational expenses. Margins might also depend on the company’s ability to reduce tuition subsidies and maintain high student-to-teacher ratio.

Competitive Landscape: The industry is highly competitive, with other for-profit educational institutions, traditional universities, and community colleges all vying for students. The competitive landscape is further complicated with increasing regulatory hurdles. Competitors include other national for-profit schools as well as a range of private and state schools and community colleges.

What Makes NAD Different? NAD’s differentiation is primarily through the specific career-focused training it provides. It also offers multiple learning formats. It caters specifically to students in areas that they will work after completing the education program.

Moat Analysis: 2/5

NAD’s moat is weak and highly susceptible to external forces. It can be viewed as having a narrow moat primarily stemming from:

  1. Regulatory Licenses/Accreditation: NAD holds accreditations from various agencies, which is essential to attract students who need recognized degrees to advance their careers. The regulatory hurdles may also protect them from other new competitors. However, those are not strong enough to create an enduring competitive advantage. This advantage will likely only result in a narrow moat.

Mistaken Moats NAD is reliant upon their brand and recognition as a quality institution. This might work well in good times, but they are prone to the fluctuations in the job market and changing trends. This does not constitute a sustainable competitive advantage or a moat. They are not a differentiated business from others.

Factors limiting their moat:

  • Lack of brand power: Many competitors also offer similar programs and certifications.
  • Low switching costs: Switching to another educational institute is fairly easy with a large number of alternatives available.
  • Non-unique product: Their courses are similar to that available from many other for-profit educational institutions.

Legitimate Risks that could harm the Moat:

  • Regulatory changes: Changes in education regulation could impact their ability to operate, receive federal aid or attract students, resulting in a loss in their profitability and a weakening of the moat. This is the biggest threat facing the for profit education sector.
  • Reputational risk: Negative news or accusations of malpractice could turn students away and hurt the brand, which would impact their attractiveness and pricing power.
  • Shifting consumer preferences: If preferences change away from their educational offering to new avenues of knowledge transfer, their relevance could diminish quickly.
  • Competition: Increase in competition or better product offering from another company could potentially damage the moat.

Business Resilience: NAD does not possess a strong business resilience, as demonstrated by financial difficulties in the recent past. Given the vulnerability of the education sector to changes and disruptions, this means they are in a precarious position to maintain profits. Their margins are prone to change with enrollments.

Financial Analysis NAD’s financials have been volatile and have faced quite significant problems in the past.

  • Revenues: NAD’s revenues have fluctuated in recent years, reflecting the trends in the for-profit education sector. The company has experienced a gradual transition to online-focused education.
  • Margins and Profitability: Margins have fluctuated due to increased competition, regulatory pressures, and the need for marketing expenditure to combat the declining enrollment.
  • Cash Flow: NAD has struggled with positive operating cash flow in recent years, with significant net losses and decreasing cash reserves.
  • Debt: NAD’s short-term and long-term debt obligations are low and manageable.
    • They have a debt-to-equity ratio of .77 in their latest reports, which is normal.

Recent Controversies NAD has faced challenges typical of for-profit education companies in recent years including declining enrolment, reduced student aid and allegations of deceptive marketing. Their revenue has fallen steadily. Their reported results are volatile due to the changing regulations and student perception and acceptance of for-profit education.

Understandability Rating: 2/5 NAD’s business is straightforward, especially when we focus on the basic model: provide education, enroll students, collect tuition fees, and so on. The basic business model is very simple to grasp. However, the complexities of the regulatory environment and the nuances of the for-profit education sector are moderately complex. The way in which the accounting is done can be complex with the revenue recognitions. There’s also complexity behind the specific degree programs, their profitability, and their market-specific demand.

Balance Sheet Health Rating: 3/5 NAD’s balance sheet is somewhat mixed, leaning towards being okay. They have minimal debt, which is good, but the continuous negative cash flows are concerning. They have adequate levels of working capital but their cash reserve is low. The overall health is not strong, and could potentially be compromised due to changes in regulatory requirements or operational difficulties. Their inability to consistently produce positive income and cash flow is a point of major concern.