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A ‘Covid stock’ that kept going when Peloton and others ran out of puff

education
education

Remember the heady dreams some investors had during the lockdowns? The ones about homebound habits persisting and companies such as Zoom and Peloton justifying their sky-high valuations?

As the world has reopened and workers have returned to their offices, those dreams have – mostly – been dashed. But not every company whose shares were lifted by lockdowns has come crashing down since.

Take Stride, the American online education provider whose sales and shares soared as Covid struck and classrooms shut, to be replaced by virtual versions.

It had seemed a textbook example of investor euphoria: in the space of just five months in the summer of 2020 the shares tripled, and as a result came to be priced at 65 times their forecast earnings.

The slump in the shares that followed in the months when vaccines were developed was predictable. But while Stride’s lofty lockdown valuation didn’t stick, something more substantial has.

A surge in sales and profits during the pandemic has proved anything but a flash in the plan: both have continued to build momentum in the years since. As have Stride’s shares: they have surpassed 2020’s peak, but crucially are now trading at a much more sensible 14 times forecast earnings for the next 12 months.

All of this has not gone unnoticed by some of the world’s best fund managers. Eleven of these investors, each among the top-performing 3pc of the 10,000 equity fund managers tracked by the financial publisher Citywire, own shares in the company.

Stride receives a top AAA rating from Citywire Elite Companies, which rates companies on the basis of their backing by the best-performing fund managers.

Progress this year has been particularly strong. In October the company announced that sales and profits targets for 2025, set three years ago, should be met a year early. Brokers responded by raising their profit forecasts for the next 12 months by a fifth and the shares have climbed by 39pc.

Now management has its sights on the next target: to more than double earnings per share over the next five years. Progress is already evident: adjusted operating margins have risen from 6pc in 2020 to nearly 11pc last year and a target of close to 17pc set for 2024.

Through its general education business, which accounts for just over 60pc of sales, Stride offers online teaching from kindergarten all the way through to the end of high school. Its smaller but faster growing career learning division aims to prepare students for jobs and provide workers with new skills.

Of the company’s 7,800 staff, 4,400 are teachers. It also manages 3,400 teachers employed by the schools it works for. Most sales come from what it calls “school as a service”. This offers pretty much everything needed to set up and run a virtual or hybrid school, including the curriculum, technology, teaching and administration.

From when Stride welcomed its first 900 virtual learners in 2001 through to today, it has taught more than 3 million students. It offers general education through 81 schools in 31 American states and career learning though 52 schools in 27 states. Contracts are normally for five years or more. It also operates private online schooling.

While management believes virtual school fulfils all the needs of only a small percentage of students – including those with special social needs, victims of severe bullying and children with certain disabilities – the market is nevertheless large and growing.

Prospects are underpinned by shortages of teachers in America, increased dissatisfaction with public schools and rising spending per pupil. Stride is also looking to expand into new states and targeting growth areas such as online tutoring, esports and higher-margin adult learning.

Growth in higher-margins sales and increased scale are two reasons the company is confident that profitability will continue to improve over coming years. So too is technology: Stride believes artificial intelligence could cut the amount of time teachers have to devote to non-teaching work such as planning and marking. An increased acceptance of digital learning materials is also expected to cut costs.

The valuation of Stride’s shares, at 14 times earnings forecast for the next 12 months, certainly does not price in the improvements management hope for. In fact, the shares have rarely been cheaper on that measure since the company floated on the New York Stock Exchange in 2007.

Sentiment could be helped by management’s prediction of a jump in free cash flow this year. Brokers forecast that the company will have net cash from next year, although this could be affected by acquisitions. Management is on the lookout for businesses that could enhance overall margins and organic growth rates.

The big long-term prize is for Stride to become a substantially more profitable company, which could dramatically improve the shares’ rating. Its lockdown valuation may have become divorced from reality in 2020’s manic market, but now it seems that investors aren’t giving the company the credit it deserves for the progress it has made.

Questor says: buy

Ticker: NYSE:LRN

Share price at close: $61.09


Algy Hall is investment editor of Citywire Elite Companies

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