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Adtalem (ATGE) Surges 67.4% in the Past 3 Months: Hold or Fold?
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Adtalem Global Education Inc. (ATGE - Free Report) shares skyrocketed 67.4% in the past three months, outperforming the Zacks Schools industry’s 3.2% growth and the broader Consumer Discretionary sector’s 3% rise. It has also fared well than the S&P 500’s growth of 11.2%.
Image Source: Zacks Investment Research
Adtalem has been substantially gaining on its leading healthcare and international institutions. The healthcare industry has performed pretty well over the past several years. Impressively, ATGE is uniquely positioned as a scalable solution to address challenges like the shortage of potential healthcare industry's workforce. This apart, the company is also working on the cost structure and long-term sustainability and growth.
It has also fared really well with a few prominent industry players like Strategic Education, Inc. (STRA - Free Report) , Bright Horizons Family Solutions Inc. (BFAM - Free Report) and Grand Canyon Education, Inc. (LOPE - Free Report) . In the past three months, STRA, BFAM and LOPE gained 20.6%, 17.4% and 15.9%, respectively.
Trading Above 50-Day Moving Average
Technical indicators suggest strong performance for ATGE. The stock is trading above its 50-day moving average, signaling a bullish trend, as shown in the chart below.
Image Source: Zacks Investment Research
What’s Contributing to the Growth Trajectory?
Growth Potential in the Healthcare Sector: The U.S. healthcare sector is struggling with a shortage of talented professionals and technicians, posing a threat to care quality and exacerbating health disparities in communities nationwide. The company expects demand for healthcare professionals to outpace supply in the future. ATGE’s post-secondary programs, which currently serve more than 85,000 students, are rigorous and tailored to meet the industry's workforce demands and aim to increase access to appealing career opportunities while delivering high-quality academic achievements.
Image Source: Zacks Investment Research
Long-Term Strategies: The company remains focused on its long-term sustainability and growth moves. On Jun 21, 2023, the company unveiled its long-term growth strategy and financial targets through fiscal 2026. The growth rate of revenues and adjusted earnings per share (EPS) for fiscal 2025 is anticipated to be in the ranges of 4-6% and 10-15%, respectively. The same for fiscal 2026 is projected to decline in the bands of 5-8% and 13-18%, respectively.
For fiscal 2024, the company now expects revenues of $1.56-$1.58 billion, up from the prior expectation of $1.52-$1.56 billion. Adjusted EPS is projected to be in the range of $4.80-$5.00, up from the prior estimated range of $4.55-$4.75 per share.
Stock Looks Undervalued
Although Adtalem’s shares outperformed the industry, it is currently undervalued, as shown in the chart below. Its current valuation is still considered undervalued, which might imply that the market has not yet fully recognized or priced the company's potential growth prospects or earnings potential.
Image Source: Zacks Investment Research
Higher Return on Equity (ROE)
ATGE’s trailing 12-month ROE is 14.1%, higher than the industry’s 3.8%. This indicates the company efficiently uses its shareholders’ funds. ROE is a gauge of a company’s profitability and how efficiently it generates those profits.
Image Source: Zacks Investment Research
Should You Buy ATGE on These Tailwinds?
The fundamental picture looks impressive for the company and investors interested in such underrated companies may pick ATGE. However, investors should also take a look at some hindering aspects of the company and the industry.
Higher Administrative Costs & Labor Woes Lingers: Increased marketing expenditures, restructuring costs, as well as business acquisition and integration costs are some of the lingering challenges. Also, an increase in labor costs to support increased enrollment, along with an increase in provision for bad debts at Chamberlain and Walden, are added woes. Skilled and professional labor has been a serious challenge for the healthcare industry. Although its cost containment efforts are solid, we are waiting for better visibility.
Over the past three years, workforce challenges have remained a primary concern for the industry. In fact, ATGE expects labor shortages will prevent the company’s growth potential for the next five years. Currently, the healthcare industry is witnessing an estimated 200,000 scarcity of nurses, and this is expected to rise to 400,000 by 2025.
ATGE’s GAAP operating income margin has fluctuated over the past three years, declining significantly to 5.55% in 2022 from 12.28% in 2021. This decline was driven by increased marketing expenditures, CEO transition costs, rising restructuring expenses, and higher business acquisition and integration costs. However, on an adjusted basis, the operating income margin improved to 19.4% in 2022 from 17.4% in 2021. In 2023, ATGE’s adjusted operating income margin further expanded to 19.8%.
Proposed New Gainful Employment (GE) Rules Raise Concern: The U.S. Department of Education has proposed new Gainful Employment (GE) regulations. These rules require each program at ATGE to meet specific debt-to-earnings ratio thresholds to maintain Title IV eligibility. The ratio assesses the debt incurred by graduates against their post-graduation earnings. If a program fails to meet these thresholds for any two out of three consecutive years, it will lose its eligibility.
Additionally, institutions must warn current and prospective students if a program is at risk of losing eligibility in the following GE year. Consequently, ATGE’s Title IV institutions could face negative impacts due to this new rule.
Estimates Revision Trends
The Zacks Consensus Estimate for fiscal 2024 and 2025 EPS has remained stable over the past 60 days. Although the estimated figure indicates 16.4% year-over-year growth in fiscal 2024 and a 16.6% rise in fiscal 2025, the muted estimate revision depicts limited upside potential for the stock.
Final Thoughts
Although the company is feeling the pressure of labor and some administration-related expenses, we believe the lingering scarcity in the healthcare industry is an excellent opportunity for ATGE. This apart, the company has been generating revenues and driving profits over the past few years. Moreover, the company has raised its fiscal 2024 revenue and adjusted earnings guidance, which again raises hope for a better picture in the future.
We believe existing stakeholders should maintain their position in this Zacks Rank #3 (Hold) stock, while potential new investors may wait for better visibility before making new investment decisions given the risk associated with labor shortage in the healthcare industry and regulatory matters.
Image: Bigstock
Adtalem (ATGE) Surges 67.4% in the Past 3 Months: Hold or Fold?
Adtalem Global Education Inc. (ATGE - Free Report) shares skyrocketed 67.4% in the past three months, outperforming the Zacks Schools industry’s 3.2% growth and the broader Consumer Discretionary sector’s 3% rise. It has also fared well than the S&P 500’s growth of 11.2%.
Image Source: Zacks Investment Research
Adtalem has been substantially gaining on its leading healthcare and international institutions. The healthcare industry has performed pretty well over the past several years. Impressively, ATGE is uniquely positioned as a scalable solution to address challenges like the shortage of potential healthcare industry's workforce. This apart, the company is also working on the cost structure and long-term sustainability and growth.
It has also fared really well with a few prominent industry players like Strategic Education, Inc. (STRA - Free Report) , Bright Horizons Family Solutions Inc. (BFAM - Free Report) and Grand Canyon Education, Inc. (LOPE - Free Report) . In the past three months, STRA, BFAM and LOPE gained 20.6%, 17.4% and 15.9%, respectively.
Trading Above 50-Day Moving Average
Technical indicators suggest strong performance for ATGE. The stock is trading above its 50-day moving average, signaling a bullish trend, as shown in the chart below.
Image Source: Zacks Investment Research
What’s Contributing to the Growth Trajectory?
Growth Potential in the Healthcare Sector: The U.S. healthcare sector is struggling with a shortage of talented professionals and technicians, posing a threat to care quality and exacerbating health disparities in communities nationwide. The company expects demand for healthcare professionals to outpace supply in the future. ATGE’s post-secondary programs, which currently serve more than 85,000 students, are rigorous and tailored to meet the industry's workforce demands and aim to increase access to appealing career opportunities while delivering high-quality academic achievements.
Image Source: Zacks Investment Research
Long-Term Strategies: The company remains focused on its long-term sustainability and growth moves. On Jun 21, 2023, the company unveiled its long-term growth strategy and financial targets through fiscal 2026. The growth rate of revenues and adjusted earnings per share (EPS) for fiscal 2025 is anticipated to be in the ranges of 4-6% and 10-15%, respectively. The same for fiscal 2026 is projected to decline in the bands of 5-8% and 13-18%, respectively.
For fiscal 2024, the company now expects revenues of $1.56-$1.58 billion, up from the prior expectation of $1.52-$1.56 billion. Adjusted EPS is projected to be in the range of $4.80-$5.00, up from the prior estimated range of $4.55-$4.75 per share.
Stock Looks Undervalued
Although Adtalem’s shares outperformed the industry, it is currently undervalued, as shown in the chart below. Its current valuation is still considered undervalued, which might imply that the market has not yet fully recognized or priced the company's potential growth prospects or earnings potential.
Image Source: Zacks Investment Research
Higher Return on Equity (ROE)
ATGE’s trailing 12-month ROE is 14.1%, higher than the industry’s 3.8%. This indicates the company efficiently uses its shareholders’ funds. ROE is a gauge of a company’s profitability and how efficiently it generates those profits.
Image Source: Zacks Investment Research
Should You Buy ATGE on These Tailwinds?
The fundamental picture looks impressive for the company and investors interested in such underrated companies may pick ATGE. However, investors should also take a look at some hindering aspects of the company and the industry.
Higher Administrative Costs & Labor Woes Lingers: Increased marketing expenditures, restructuring costs, as well as business acquisition and integration costs are some of the lingering challenges. Also, an increase in labor costs to support increased enrollment, along with an increase in provision for bad debts at Chamberlain and Walden, are added woes. Skilled and professional labor has been a serious challenge for the healthcare industry. Although its cost containment efforts are solid, we are waiting for better visibility.
Over the past three years, workforce challenges have remained a primary concern for the industry. In fact, ATGE expects labor shortages will prevent the company’s growth potential for the next five years. Currently, the healthcare industry is witnessing an estimated 200,000 scarcity of nurses, and this is expected to rise to 400,000 by 2025.
ATGE’s GAAP operating income margin has fluctuated over the past three years, declining significantly to 5.55% in 2022 from 12.28% in 2021. This decline was driven by increased marketing expenditures, CEO transition costs, rising restructuring expenses, and higher business acquisition and integration costs. However, on an adjusted basis, the operating income margin improved to 19.4% in 2022 from 17.4% in 2021. In 2023, ATGE’s adjusted operating income margin further expanded to 19.8%.
Proposed New Gainful Employment (GE) Rules Raise Concern: The U.S. Department of Education has proposed new Gainful Employment (GE) regulations. These rules require each program at ATGE to meet specific debt-to-earnings ratio thresholds to maintain Title IV eligibility. The ratio assesses the debt incurred by graduates against their post-graduation earnings. If a program fails to meet these thresholds for any two out of three consecutive years, it will lose its eligibility.
Additionally, institutions must warn current and prospective students if a program is at risk of losing eligibility in the following GE year. Consequently, ATGE’s Title IV institutions could face negative impacts due to this new rule.
Estimates Revision Trends
The Zacks Consensus Estimate for fiscal 2024 and 2025 EPS has remained stable over the past 60 days. Although the estimated figure indicates 16.4% year-over-year growth in fiscal 2024 and a 16.6% rise in fiscal 2025, the muted estimate revision depicts limited upside potential for the stock.
Final Thoughts
Although the company is feeling the pressure of labor and some administration-related expenses, we believe the lingering scarcity in the healthcare industry is an excellent opportunity for ATGE. This apart, the company has been generating revenues and driving profits over the past few years. Moreover, the company has raised its fiscal 2024 revenue and adjusted earnings guidance, which again raises hope for a better picture in the future.
We believe existing stakeholders should maintain their position in this Zacks Rank #3 (Hold) stock, while potential new investors may wait for better visibility before making new investment decisions given the risk associated with labor shortage in the healthcare industry and regulatory matters.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.