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K12, Inc. Message Board

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  • sms199082 sms199082 Aug 13, 2012 3:32 PM Flag


    Their revenue comes from being reimbursed by cash-strapped states. I don't know if you've been paying attention to the terrible cuts that are happening nationwide with state budgets but education costs are getting squeezed. And you have lots of these students that don't finish the curriculum because the original LRN model was designed for self-starter students...but, naturally, there's no profit in those rare-type of students so instead they farmed this curriculum out to at-risk students which really isn't 'better' education per se.

    Take a look at the cost dynamics. You can spout top-line growth and that's great but it tells half the story. This company still has trouble turning a profit or when it does it has a razor-thin margin because the costs to fuel that growth are 1:1 with the attainment of that revenue. THAT IS WHAT A NON-SCALABLE MODEL LOOKS LIKE. Your marginal costs are constant and don't decline. You don't get to value this company like AMZN and just look at top-line growth. Heck, AMZN shouldn't be valued like AMZN is being valued.

    As for your paranoid 'the world is paying people to bash this company' you really need to give yourself a healthy dose of skepticism on most of the for-profit educational companies, in general. They're not great investments. You can believe in the cause, by all means. Hey, however folks wanna do the educational thing, that's great. But from a financial perspective, these are awful investments especially at these valuations.

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    • States are indeed cash strapped. But this is another reason why K12 will continue to do well. A student using K12 costs the state about 1/2 what it would cost to educate that student in a bricks and mortar school. Why would the state turn around and not allow virtual schools when they are saving money on the margin?

      As for the type of students who use K12, Packard has been very upfront that many of K12 students are those who have not done well in a regular school. The criteria of success with K12 for those students is not how they do compared to regular students - they start well behind when they begin - but is if they begin to catch up somewhat in K12. K12 also offer a flexible for military families, for those who oppose the culture of regular schools and those who homeschool for religious reasons.

      You are incorrect on the cost dynamics because you have not looked closely enough at the financials. Net profit is skewed by many things including acquisition costs, integration costs, etc. A better metric is EBIDTA. And here K12 has done very well. Here are the EDITDA in 1,000s for the past few years:

      2008 25,650
      2009 43,200
      2010 61,228
      2011 67,148
      2012 90,000 (est.)

      Cash flow, another excellent metric has also grown rapidly.

      I'd say they are scaling very nicely.

      I do have a healthy does of skepticism for for profit educational companies because most of them are at the college level and are dependent on federal loans for their students. K12, however, is exclusively at the 1-12 grade level and not dependent on loans. They have both a price and quality advantage over the brick and mortar schools when comparisons are done on an apples to apple basis.

      K12 now sells for an EV/OCF ratio of just 7.9 (5.5 if the net receivables are included as cash). The PE based on EBIDTA is 11. The PS is just 1.2 and the EV/sales is only 1. Those are all very low numbers for a company growing as fast as is K12. I am very comfortable with my investment in K12 and expect it to be quite profitable. If you disagree, fine. That's why they have a stock market.


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