K12 Inc (LRN) is a for-profit school that teaches kids from Kindergarten through 12th grade. I like the company’s business model — and the fact management had worked for the University of Phoenix in the past. This company is growing very rapidly, and for-profit K through 12 education is not being scrutinized as much as for-profit college education.
LRN had an awful earnings report last quarter, the company missed by 22 cents and had profits down 71%. K12 is still growing, with enrollment up 42% over last year, but profit estimates just dropped from $0.84 to $0.59 for fiscal year 2011. The company made $0.71 in fiscal 2010 so that means profits will be down 17% in 2011, not up 18% as I had expected.
One-year chart
The numbers look bad in the one-year chart. Last quarter the earnings outlook was so much better. Do note that the estimates Long Term Growth Rate is 29% — this is the main reason I watch this stock.
When I read the company’s quarterly earnings release, I don’t find many reasons why LRN missed. K12 did invest in Web International English (Web), a Chinese English language trainer, but there is no mention of the cost of this investment, or how much this hurt/will help profits. Last quarter, revenue grew to $135 million, up from $106 million a year-ago (+27%) but profits fell to $0.07 from $0.24 last year because “Total costs and expenses” rose to $129 million from $94 million. Where was the money spent?
Overall the quarterly report said glowing things about a company that just missed by a bunch and slashed guidance. I would have appreciated management manning up and telling me why profits were down instead of giving me all the good things K12 has going for it.
One to wait on
I have LRN on the radar because its growing rapidly, but I’m not too interested in Education stocks with the economy growing strong. I don’t like the fact LRN missed and guided way lower without spelling out in its earnings release where the shortfall is coming from. Management still has some learning to do.
