Since September 2020, the S&P 500 has delivered a total return of 93.3%. But one standout stock has doubled the market - over the past five years, Lincoln Educational has surged 191% to $19.76 per share. Its momentum hasn’t stopped as it’s also gained 30.1% in the last six months thanks to its solid quarterly results, beating the S&P by 14.1%.
Is now the time to buy Lincoln Educational, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Lincoln Educational Will Underperform?
Despite the momentum, we're cautious about Lincoln Educational. Here are three reasons there are better opportunities than LINC and a stock we'd rather own.
1. Weak Growth in Enrolled Students Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Lincoln Educational, our preferred volume metric is enrolled students). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Lincoln Educational’s enrolled students came in at 14,356 in the latest quarter, and over the last two years, averaged 9.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the last two years, Lincoln Educational’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 11%, meaning it lit $11.02 of cash on fire for every $100 in revenue.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Lincoln Educational’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Lincoln Educational, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 9.6× forward EV-to-EBITDA (or $19.76 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. Let us point you toward the most dominant software business in the world.
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