Health Care Workforce Shortages And Digital Learning Will Support This Bullish Long Term Thesis

Catalysts

About Covista

Covista provides higher education programs focused on health care and related professional fields.

What are the underlying business or industry changes driving this perspective?

• Persistent health care workforce shortages in nursing, medicine and behavioral health create a structural need for large scale training capacity, which can support sustained demand for Covista's programs and underpin revenue growth.
• Rising acceptance of flexible digital learning for working adults, reflected in Walden's record 52,400 students and ongoing program launches in areas like applied behavioral analysis and clinical psychology, can expand addressable markets and support earnings through scale efficiencies.
• Capacity expansion across Chamberlain, Walden and Med/Vet, including new campuses, an online BSN platform across 38 states and new enrollment pathways, can lift utilization of existing assets and support higher adjusted EBITDA margins over time.
• Operational actions to improve marketing effectiveness and enrollment funnel conversion at Chamberlain, coupled with double digit application growth in both pre and post licensure nursing, can help re accelerate total enrollment and support revenue and earnings.
• Robust cash generation of US$428 million over the last 12 months and a remaining US$728 million share repurchase authorization give Covista room to invest in new capacity and student facing technology while also reducing share count, which can support earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Covista's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.4% today to 15.1% in 3 years time.
• Analysts expect earnings to reach $348.8 million (and earnings per share of $10.04) by about April 2029, up from $254.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 16.6x on those 2029 earnings, up from 15.6x today. This future PE is lower than the current PE for the US Consumer Services industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 3.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.31%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Health care workforce shortages are central to Covista's growth story, so a long term easing of these shortages through policy changes, automation or alternative training models could slow demand for new program capacity. This could pressure revenue growth and limit the ability to expand earnings.
• The model relies heavily on digital learning and online enrollment scale at Walden and Chamberlain, so any shift in long term student preferences back toward in person learning or increased competition from lower cost online providers could reduce enrollment momentum. This may compress tuition pricing power and weigh on margins.
• Regulatory changes around student lending, including upcoming loan cap changes and reliance on supplemental lenders such as Sallie Mae, could make programs less affordable for students over time. This may constrain enrollment growth and create headwinds for revenue and net income.
• Chamberlain is currently seeing flat to soft total enrollment and margin pressure from capacity and student support investments. If application growth does not convert into sustained enrollment and utilization, the nursing segment could deliver weaker profitability, which would limit consolidated EBITDA and earnings growth.
• The model depends on high cash generation to fund capacity expansion and large share repurchases, so any sustained dip in enrollment, pricing or margins across Walden, Chamberlain or Med/Vet could reduce free cash flow. This could limit buybacks and lower the earnings per share outcome that underpins the current valuation narrative.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $153.25 for Covista based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $175.0, and the most bearish reporting a price target of just $130.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $2.3 billion, earnings will come to $348.8 million, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 7.3%.
• Given the current share price of $114.94, the analyst price target of $153.25 is 25.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.