Ariel Investment leader John Rogers (Trades, Portfolio) disclosed earlier this week his firm increased its Adtalem Global Education Inc. (ATGE, Financial) stake by 35.4%.
The guru’s Chicago-based firm invests in undervalued small and mid-cap companies that have sustainable competitive advantages, high barriers to entry and predictable fundamentals that allow for double-digit earnings growth. Like the tortoise featured in the firm’s logo, Rogers emphasizes that patience, independent thinking and a long-term outlook are necessary for generating good returns.
According to GuruFocus Real-Time Picks, a Premium feature, the firm invested in 1.3 million shares of the Chicago-based education company on Dec. 31, impacting the equity portfolio by 0.35%. The stock traded for an average price of $29.56 per share on the day of the transaction.
Ariel now holds 5.03 million shares total, accounting for 1.35% of the equity portfolio. GuruFocus estimates the firm has lost 0.97% on the long-held investment.
The company, which operates several for-profit higher education institutions, including Chamberlain University, EduPristine, the Ross University Schools of Medicine and Veterinary Medicine and Walden University, has a $1.49 billion market cap; its shares were trading around $30.01 on Tuesday with a price-earnings ratio without non-recurring items of 47.64, a price-book ratio of 1.18 and a price-sales ratio of 1.28.
Based on its historical ratios, past performance and future earnings projections, the GF Value Line suggests the stock is a possible value trap currently, so investors should do thorough research before making a decision.
The company released its first-quarter 2022 financial results on Nov. 3. It posted a diluted loss of $1.17 per share on $348.3 million in revenue. While the earnings loss deepened from the prior-year quarter, sales improved 29.9% due to the acquisition of Walden University in August. The net loss came in at $58 million.
In a statement, President and CEO Steve Beard highlighted the “significant progress” the company had made on its key initiatives of introducing a new operating model and leadership appointments that will allow it to “accelerate the performance of our health care-focused assets.”
“We believe these changes, coupled with our enhanced scale and capabilities, better position us to create long-term value for our students, employer partners and shareholders alike,” he said.
For the full fiscal year, Adtalem is expecting adjusted revenue between $1.68 billion and $1.74 billion and adjusted earnings ranging from $4.20 to $4.45 per share.
GuruFocus rated Adtalem’s financial strength 4 out of 10. As a result of issuing approximately $1.4 billion in new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of 1.51 warns the company could potentially face bankruptcy if it does not improve its liquidity. The return on invested capital is also being eclipsed by the weighted average cost of capital, meaning the company is struggling to create value as it grows.
The company’s profitability fared better, scoring a 7 out of 10 rating on the back of operating margin expansion. Its returns on equity, assets and capital, however, underperform at least half of its competitors. Adtalem is also supported by a moderate Piotroski F-Score of 5 out of 9, which means business conditions are typical for a stable company. The predictability rank of one out of five stars, however, is on watch. GuruFocus data shows companies with this rank return, on average, 1.1% annually over a 10-year period.
Of the gurus invested in Adtalem, Rogers’ firm has the largest stake with 10.11% of its outstanding shares. Jeremy Grantham (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Joel Greenblatt (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss also own the stock.
Portfolio composition and performance
The Ariel Fund's $10.94 billion equity portfolio, which was composed of 109 stocks as of the end of the third quarter of 2021, was largely invested in the financial services (21.54%), communication services (17.63%) and industrials (17.53%) sectors.
Other consumer defensive companies the fund was invested in as of Sept. 30 were Molson Coors Beverage Co. (TAP, Financial), JM Smucker Co. (SJM, Financial) and Philip Morris International Inc. (PM, Financial).
The Ariel Fund posted a return of 30.36% for fiscal 2021, topping the S&P 500's 28.7% return.
