Bridgepoint Education Inc

Bridgepoint Education Inc (BPI) A Best Buy?

July 7th, 2013 Posted by Investment Valuation No Comment yet

Bridgepoint Education Inc (BPI). When we talk about community colleges, there are so many colleges that pop up in my mind and one of this is the Bridgepoint Education Inc. The question is, “Are community colleges a better bet than any other exclusive schools like Harvard? Is it wise to consider Education Services in our portfolio?”

BPI Value Investing Approach 

This Pricing Model was prepared in a very simple and easy way to value a company for business valuation.  We adopt the investment style which we think applicable to the company, we looked for companies with a strong balance sheet or those with little debt, above average profit margin and ample cash flow. This valuation style is to seek out undervalued companies whose stock price is temporarily down, but fundamentals are sound in the long run. The philosophy was to buy wisely when prices fall and to sell wisely when the prices rise a great deal. My basis of valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. In this model, we calculated first the enterprise value as our initial step in this valuation.

BPI Investment in Enterprise Value    

The concept of enterprise value is to calculate what it would cost to purchase an entire business.

BPI EV

The market capitalization of Bridgepoint Education Inc was erratic in movement. During 2012, it experienced a 53 percent drop from 2011. Total debt was zero percent while its cash and cash equivalent were 54 percent of the enterprise value, thus making the enterprise value lesser than the market value.  The equation in buying the entire business of BPI was 100 percent equity and zero percent total debt.

The takeover price of the entire business of BPI to date, May 19, 2013, was $260 million at $282 million at $5.04 per share. The market price to date was $12.49 per share.

Net Current Asset Value (NCAV) Method   

Studies have all shown that Net Current Asset Value (NCAV) method of selecting stocks has outperformed the market significantly.

 The reason for this is when a stock is trading below the Net Current Asset Value Per Share, they are essentially trading below the company’s liquidation value and therefore, the stock was trading at a bargain, and it is worth buying.

BPI NCAV

The net current asset value approach of Benjamin Graham tells us that the stock price was overvalued from 2010 up to the trailing twelve months. The net current asset value was $206 average while the average net current asset value per share was $3.63 and the 66 percent ratio was $2.40 average. In addition, the market price was $15.78 average.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation

Market Capitalization / NCAV = Result (must be lesser than 1.2)
Bridgepoint Education Inc

The MC/NCAV method tells us that the BPI’s stocks are trading overvalued because the ratio exceeded the 1.2 ratios from 2008 to the trailing twelve months.

The margin of Safety (MOS)           

The Margin of Safety requires knowing when the buying price is low in absolute terms, rather than merely relative to the market as a whole.

EV takes into account the balance sheet so it is a much more accurate measure of the company’s true market value than market capitalization. The margin of safety was calculated at Margin of Safety = Enterprise Value – Intrinsic Value. The table shows the historical calculation for the margin of safety.

 Bridgepoint Education Inc

Explanation

The average margin of safety was 97 percent. The intrinsic value was $274 average while the enterprise value was $9 average.

Formula: Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate)     

The explanation in the calculation of intrinsic value was as follows:

  • EPS: the company’s last 12-month earnings per share;
  • G: the company’s long-  term (five years) sustainable growth estimate;
  • 9: the constant represents the appropriate P-E ratio for a no-growth  as proposed and
  • 2: the average yield on high-grade corporate bonds.
 Bridgepoint Education Inc

Explanation

The result of the calculation shows that the average earning per share $2.27 and the sustainable growth rate were $50.62 average.  Annual growth rate, on the other hand, was $110 average.

The term earnings per share (EPS) represents the portion of the company’s earnings, net of taxes and preferred stock dividends, that are allocated to each share of common stock. The figure can be calculated by simply dividing net income earned in a given reporting period by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used. The formula for earnings per share was:

     EPS

Sustainable Growth Rate

She sustainable growth rate (SGR), on the other hand, shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio. Sustainable growth rate = ROE x (1 – dividend-payout ratio)

Below is the table for a sustainable growth rate.

BPI SGR

Explanation

The table shows that the return on equity was 50.62 percent, average while the payout ratio was zero percent. This means that  BPI is not giving cash dividends to its shareholders. In addition, the sustainable growth rate was 50.62 as well because there was a zero payout ratio.

To be able to calculate for the SGR, we need to know first the ROE. It shows how many dollars of earnings result from each dollar of equity.

ROE

Intrinsic Value

Let us walk step by step. 

BPI Graph

As we can see, the intrinsic value line was erratic in movement. In 2009 to 2010, the increased was 188 percent, and from 2010 to 2011, there was another increase of 20 percent. Further, it suddenly dropped to 20 percent in 2012 then remained stable for the trailing twelve months.

Explanation

Let us dig a little on the net earnings of the company and find out if the trend is the same as the intrinsic value. The net earnings from 2009 to 2010 had increased by 188 percent, then it increased by 3 percent in 2011 and then dropped to 3 percent in 2012 and 1 percent in the trailing twelve months. You see, whatever trend it has in the intrinsic value, the same trend it has in the net earnings of the company. So, by just looking at the line of the true value of the stock you will know what had happened to the operation of the company, as intrinsic value factors the growth of the company.

Further, the enterprise value remained stable at an average of $9. The margin of safety is the space between these two lines. In other words, it is the difference between enterprise value and the intrinsic value. If you will notice, the intrinsic value line is high above the EV line, meaning, the MOS was high also during these periods.

Price to Earnings/Earning Per Share (P/E*EPS) 

This valuation will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

BPI PE EPS

The stock of BPI was undervalued in 2010 because the enterprise value was lesser than the P/E*EPS ratio. The enterprise value was average $9, while the P/E*EPS ratio was average $17, thus the price was cheap.

The Enterprise value (EV)/Earning Per Share (EPS) or (EV/EPS)     

The use of this ratio is to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

BPI EV EPS

The EV/EPS valuation tells us that the price (P/E) was 37 percent while the earnings (EPS) was 63 percent. It indicates that the price was undervalued because the price was lesser than earnings.

Enterprise Value (EV) / Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)     

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses.

BPI EV EBITDA

EV/EBITDA tells us that it will take 2 years to recover the costs of buying the entire business of BPI. In other words, it will take 2 times the cash earnings of BPI to recover the cost of buying the entire business. The EBITDA was 59 percent of the enterprise value.

Overview

The market capitalization of Bridgepoint Education Inc was erratic in movement. In 2012 it experienced a 53 percent drop from 2011. Total debt was zero percent while its cash and cash equivalent were 54 percent of the enterprise value. Thus making the enterprise value lesser than the market value.  The equation in buying the entire business of BPI was 100 percent equity and zero percent total debt.    

The takeover price of the entire business of BPI to date, May 19, 2013, was $260 million at $282 million at $5.04 per share. The market price to date was $12.49 per share.

Net Current Asset Value

The net current asset value approach tells us that the stock price was overvalued. Further, it tells us that the stock of BPI did not pass the stock test. Because the stock was trading above the liquidation value of the company.

On the other hand, the MC/NCAV method tells us that the stocks are trading overvalued. Because the ratio exceeded the 1.2 ratios from 2008 to the trailing twelve months.

Margin of Safety

In addition, the average margin of safety was 97 percent while the intrinsic value was $274 average. The average earning per share was $2.27 and the sustainable growth rate was $50.62 average.  While the annual growth rate was $110 average. And the return on equity was 50.62 percent average so as the sustainable growth rate of 50.62. And the payout ratio was zero percent.

P/E*EPS

The relative valuation in the P/E*EPS valuation indicates that the stock of BPI was undervalued in 2010. For the reason that the enterprise value was lesser than the P/E*EPS ratio. On the other hand, the EV/EPS valuation tells us that the price (P/E) was 37 percent while the earnings (EPS) was 63 percent.

EV/EBITDA

The EV/EBITDA tells us that it will take 2 years to recover the costs of buying the entire business. It will take 2 times the cash earnings to recover the cost of buying the entire business. The EBITDA was 59 percent of the enterprise value.

Overall, the stock price of BPI was undervalued, further, its margin of safety was impressive. Further, the EV/EBITDA was satisfactory, therefore, I recommend a BUY on the stock of Bridgepoint Education Inc.

Research and Written by Criselda

Interested to learn more about the company? Here’s an investment guide for a quick view, company research to know more about its background and history; and value investing guide for the financial status.

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