Merrill is very smart to keep its buy recommendation. Anyone who listened to the call carefully will understand that K12 has positioned itself for very strong growth going forward and that the "miss" in earnings was due to short term non-recurring events. I have taken advantage of the markets shortsightedness to add shares.
Some important points:
The recent election put most state legislatures in the hands of Republicans who are much more willing to support charter schools and raise the cap limits. This is the core business of LRN and will result in faster growth.
The acquisitions made this year all position K12 for growth in their target markets and in new markets overseas. English language courses in China are on an exponential growth curve. The other acquisitions enable K12 to pick up curriculum at a very low price. They did not overpay for any of them.
They guided for revenue of $500 million this year even before the acquisitions. I think they might do close to $600 million. It will only be a couple of years before K12 is doing $1 billion in revenue. The EV is currently only 700 million.
The higher revenues will allow them to spread out overhead costs and drive up margins. They will also provide a moat around their business as the startup costs in developing an acceptable curriculum in this space and building up a clientele are large. Switching costs are also large for their clients. Combined these factors are giving K12 a big and lasting competitive advantage. With expected EBIDTA of $85M this year they are on sale.