Laureate Education IPO Gets An ‘F’
Jan. 31, 2017 2:10 PM ET
Laureate Education is set for an IPO which can raise them over $550 million. The company faces high debt in a tough industry. Suffocating debt combined with signs of declining revenue are reasons to skip this IPO. I wrote an article back in October of 2015 about the Laureate Education (NASDAQ:LAUR) IPO here. While I was bearish on the company when I wrote that article not much has changed. However, since the IPO is only a couple days away I thought I would take the time to reiterate my concerns.
They Are Leveraged
Laureate Education is swimming in nearly $4 billion in long-term debt, which can present a problem operating in the for-profit education industry. On the short-term horizon, they have enough cash to get around but don’t currently have comfortable liquidity. They have a cash ratio of 0.25 but a current ratio of 0.78. This shows that the IPO proceeds are going to be important for Laureate Education. Their cash position nearly triples after adjusting for IPO proceeds. However, I would anticipate a large sum of that money would be utilized to pay down some of their long-term debt, which has created huge interest expense that has been eating into their bottom line. Taking into consideration the industry and Laureate Education’s growth, I am not comfortable with $4 billion of long-term debt sitting on their books.
Source: Laureate Education’s S-1
Revenue Is Now Down
Originally, Laureate Education was a company that had growth in a struggling industry, however that may be slipping away. For the first 9 months of 2016, Laureate Education saw a decline in sales of more than 2% from the same period of the year prior. Total revenue for 2015 was down nearly 3%. When I wrote my article back in 2015 the company was seeing big growth with 2014 sales up nearly 13%. With that growth came debt, but I believed that their growth was going to be the story behind the IPO, however they have now lost that. Not only did Laureate Education lose growth on their top line for the first 9 months of 2016 but they also took larger losses on their bottom line.
Source: Laureate Education’s S-1
The Industry Is Still Rocky
The education and training services industry has a negative 3-year growth rate of -2.9%, and now Laureate Education looks to be starting to fall in line with that number. Direct competitor DeVry Education Group (NYSE:DV) falls into that line with a negative 3-year growth rate of -2.1%. Throw in that Laureate Education is a public-benefit company, which means they have an additional responsibility to protect their stakeholders, rather than just focusing on satisfying shareholders by maximizing profits. This is something that comes with the territory, however it can make a difference on the bottom line.
Laureate Education is looking at a valuation of nearly $3 billion. At first glance that may seem like a deal. It’s a PS of 0.7 compared to the industry average of 1.8. They have a stockholders’ equity of $652 million, however with the IPO proceeds it should improve and help place them in line with the industry PB ratio average of 2.9. So, if you want to use those multiples then maybe you’ll see a deal here. However, the company is far more leveraged than its competitors and it is contributing to suffocating them. Although they carry an attractive operating margin of roughly 6.9%, their debt is inhibiting their ability from turning a positive net margin, which is ruining their value. Throw in the fact that they are starting to see a downturn in revenue and I cannot see this one fetching a $3 billion value.
I don’t think anything has gotten better for Laureate Education since they originally filed for an IPO, but rather the opposite. They may have lost their window of opportunity for a more favorable valuation. There are too many macro and micro issues and risks with this IPO to jump in. Long-term this IPO is not a winner in my opinion.