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Can Adtalem's (ATGE) Strategic Initiatives Combat Cost Woes?

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Adtalem Global Education Inc.’s ATGE business has been rallying on investment initiatives and the introduction of short-term programs. Also, cost-saving initiatives and growing demand in health care and international institutions are adding to the bliss.

However, restructuring charges, increased marketing-related expenses and some macro-economic factors have been putting pressure on its bottom line. Evidently, its shares have declined 25.6% in the past year, broadly underperforming the industry’s 46.5% rally.

The underperformance can be further attributed to discouraging surprise history. Its earnings lagged analysts’ expectations in two of the trailing six quarters, with an average negative surprise of 2.3%. In the first quarter of fiscal 2020, earnings missed the Zacks Consensus Estimate by more than 26% and fell nearly 23% year over year.

Let’s take a look at the factors substantiating the company’s Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Driving Growth

In order to deliver direct returns to its shareholders, Adtalem laid out various investment plans that include partnering with corporations, hospitals, government agencies and professional organizations to design education programs aimed at teaching new skills to employees; introduction of short-term programs to meet students’ preference and employers’ needs; and expansion in Asia, U.K., Latin America and the greater European market. Such initiatives are expected to drive enrollments, which will in turn boost its revenues. In fiscal first-quarter 2020, the company recorded year-over-year growth of 2.3% in new student enrollment.

Moreover, on May 31, 2019, it acquired the financial services division of OnCourse Learning to broaden its reach across governance, risk and compliance sectors; as well as boosted the ability to meet employers’ requirements in the dynamic financial services industry. The company will continue to leverage organizational synergies and expand efficiency initiatives across enterprises.

Adtalem’s health care and international institutions have recorded significant improvement in revenues and profitability over the past few years. In particular, Chamberlain university remains well positioned to gain from growing demand for nurses and the increasing roles they play in the healthcare industry. The company is optimistic about the demand trend in the medical and healthcare segment from both students and employees. To drive the segment’s future performance, it modified the pricing model in certain markets served and introduced evening and weekend classes to attract more students.

Causes of Concern

Despite undertaking various initiatives and actions, the company’s bottom line has been under pressure due to certain restructuring charges related to the impairment of land, buildings and equipment at the Dominica campus of RUSM. Also, increased marketing-related expenses are adding to the woes. The company — which shares space with Strategic Education, Inc. STRA, Career Education Corporation and New Oriental Education & Technology Group Inc. EDU in the same industry — projects to incur more marketing expenses in the first half of fiscal 2020 than second-half fiscal 2019.

In addition to the above-mentioned headwinds, improving employment situation and Title IV program integrity regulations are persistent concerns for the company. Moreover, budget constraints in states that provide financial aid to Adtalem students may affect its enrollment growth and thereby profitability.

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