This Small Cap Is Only 2x Earnings

For more detailed analysis visit our website: https://www.overlookedalpha.com

Lincoln Educational Services has been around for 75 years and provides training programs for skilled trades like auto mechanics, welders, machiners as well as healthcare jobs like nursing and hospitality jobs like cooking. Recently the company signed an agreement with Tesla to train technicians for electric vehicles.

Fundamentally, Lincoln stock is extremely cheap. With a market cap of $133.7 million plus $67 million of cash on the balance sheet, Lincoln now has an enterprise value of roughly $66.7 million.

But Lincoln is also selling one of its campuses for $34 million. Take that into consideration and the enterprise value drops to only $33 million.

Sure, the company will need to build another campus but withholding $15-20 million for the new campus, enterprise value still doesn’t push much past above $60 million.

Meanwhile, the company made $335 million in revenue last year and is guiding for $25-$30 million in adjusted EBITDA for 2022 and $10-$15 million in net income..

In other words, Lincoln is now trading around 2 times adjusted ebitda and roughly 5 times net income. But this isn’t actually a terrible business. Revenue has grown 30% gross since 2018 and adjusted EBITDA has more than doubled.

To be fair, Lincoln’s performance before that was weak. Revenue flatlined between 2012 to 2017 and the stock pretty much went nowhere.

Part of the problem was the economy. When the economy is booming, unemployment drops and Lincoln sees fewer students taking up its courses. As a result, Lincoln had to initiate a turnaround, cutting costs and closing campuses.

Those changes seem to be working. Profit margins have climbed 8% since 2017 and student enrolments are trending higher. Now the economy is weakening, demand for Lincoln’s courses could increase dramatically. To be blunt, when people are laid off, one of the things they tend to do is re-train.

And there are shortages of auto mechanics, electricians, welders, and nurses. Those programs account for more than half of Lincoln students and approximately 90% of Lincoln graduates are deemed as essential workers. So Lincoln is a stock that offers defensive properties during a difficult economy.

Let’s assume a scenario where Lincoln manages to hit 35 million in ebitda in 4 years time (a growth rate of around 10%) and then assume the stock trades at 5x those earnings. That would put enterprise value at around $175 million for an investment return of roughly 27% per year.

That’s without taking into account the forthcoming campus sale. So this isn’t a sexy business like Apple or Tesla. But cash on the balance sheet and the counter cyclical nature of Lincoln’s services make this an intriguing investment case.

Which is why I do own a position in this stock. But remember these are just my opinions and this is a very small company which are often riskier than large caps. So this is for information purposes only.