The past six months have been a windfall for Lincoln Educational’s shareholders. The company’s stock price has jumped 40.6%, hitting $22.40 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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 swiping left on Lincoln Educational for now. Here are three reasons why we avoid 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 15,904 in the latest quarter, and over the last two years, averaged 9.5% 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 10.8%, meaning it lit $10.83 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
Lincoln Educational falls short of our quality standards. Following the recent surge, the stock trades at 11.5× forward EV-to-EBITDA (or $22.40 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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