K12 Inc. (LRN - Free Report) has been benefiting from strong enrollment growth in its Managed Public School Programs or MPS line of business, innovative marketing initiatives and prudent career-readiness courses. Shares of the company have rallied more than 36% in the past six months against its industry’s fall of 26.6%. This outperformance was backed by solid earnings surprise history of the company, having surpassed the Zacks Consensus Estimate in seven out of the past eight quarters.
Moreover, earnings estimates have risen over the past few weeks, suggesting bullish sentiments on K12. Over the past 60 days, the Zacks Consensus Estimate for fiscal 2019 and 2020 earnings have been revised 28.8% and 30.3% upward, respectively. Meanwhile, earnings estimates for the current quarter have moved 83.9% north over the same time frame. This bullish trend justifies the stock’s Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
What Makes the Stock a Solid Pick?
Strong Business Lines: This technology-based education company operates under three line of businesses. The company’s MPS line of business (accounting for 87.8% of the total revenues) has been registering higher enrollment growth. Notably, K12 provides substantially all the administrative support, information technology, academic support services, online curriculum, learning system platforms and instructional services in this line of business.
At the end of the first quarter of fiscal 2019, enrollments in MPS business reached 118,800, reflecting a 6.9% year-over-year increase (strongest in six years). This marks the third consecutive year of growth in MPS enrollment.
The company has been implementing innovative models of education for schools of businesses around the nation. It is also introducing career-readiness courses, organizing career pathways and building partnerships for providing higher education. The company is also covering project-based learning to help students prepare for the challenging workplace.
Upbeat View: Based on strong enrollment growth, it expects full-year revenues to increase between 9% and 10% year over year. Much like enrollment, the company expects revenue growth to be the highest in the past six years. Additionally, K12 anticipates revenue per enrollment growth of 46% for fiscal 2019, backed by higher enrollment in states like Ohio, Pennsylvania, California, as well as other variables. In other words, school mix is driving much of its revenue per enrollment growth.
Adjusted operating income is expected to increase more than 20%. This improvement will be driven by revenue growth and proactive cost management.
The company has solid growth prospects, as is evident from the Zacks Consensus Estimate for earnings for the current quarter and year of 57 cents and 76 cents per share, which are expected to grow 72.7% and 11.8%, respectively, on a year-over-year basis. Meanwhile, its sales for the current quarter and year are expected to increase 16% and 9.6%, respectively. The company has an expected three-five year EPS growth rate of 15%.
Positive Industry Fundamentals: A big reason for choosing to invest in a for-profit education stock like K12 is the evolving industry prospects, backed by the much-needed regulatory support from the Trump administration.
The Trump administration is working on revising for-profit education industry regulations, as announced by the U.S. Department of Education last year. This industry-friendly approach has helped for-profit education companies to gain momentum. Industry giants are also finding innovative ways to compete and deliver returns to their shareholders.
Other Stocks to Consider
Other top-ranked stocks in the same space include Adtalem Global Education Inc. (ATGE - Free Report) , Bright Horizons Family Solutions Inc. (BFAM - Free Report) and Universal Technical Institute Inc (UTI - Free Report) , each carrying a Zacks Rank #2 (Buy).
Adtalem has an expected three-five year EPS growth rate of 13.3%.
Bright Horizons is expected to record an EPS growth rate of 17.1% this year.
Universal Technical’s earnings for the current year are expected to increase 57.6%.
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