Health Care Workforce Shortages Will Pressure Capacity Expansion Yet Support Long Term Potential

Catalysts

About Covista

Covista is a health care education provider focused on training nurses, physicians, veterinarians and behavioral health professionals at scale.

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

• Although demand for health care professionals in the United States is described as intensifying, any benefit to Covista from addressing workforce shortages could be constrained if new or existing competitors expand capacity faster or at lower cost. This would limit pricing power and could pressure revenue growth over time.
• Although Walden and the wider portfolio are using digital learning platforms and flexible online programs to attract working adults, the reliance on continued program expansion and technology upgrades could raise ongoing content and platform costs. This would likely cap the extent of any future margin improvement.
• While Chamberlain’s nursing programs hold leading national positions and pre licensure enrollment has risen over several years, the recent pause in total enrollment growth and weakness in post licensure programs highlight execution risk. Any slower than expected recovery would likely weigh on segment revenue and group earnings.
• Although Med/Vet institutions operate close to existing capacity and benefit from high pass rates, future expansion depends on adding new seats and pathways that may require heavy upfront investment and regulatory approvals. This could dilute margins before additional enrollment flows through to earnings.
• While management points to strong cash generation and active capital deployment into new capacity and student facing technology, misjudging the return on these projects or facing tighter lending structures around student financing could limit the uplift to future revenue and compress net margins.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Covista compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Covista's revenue will grow by 7.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.1% today to 14.8% in 3 years time.
• The bearish analysts expect earnings to reach $353.2 million (and earnings per share of $10.72) by about June 2029, up from $249.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.2x on those 2029 earnings, down from 16.9x today. This future PE is lower than the current PE for the US Consumer Services industry at 15.8x.
• The bearish analysts expect the number of shares outstanding to decline by 5.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.47%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Health care workforce shortages support long-term demand for training, but if other education providers add capacity faster or offer lower cost programs, Covista could lose share in nursing, medical, veterinary and behavioral health, which would constrain future revenue and earnings growth.
• Walden and other digital platforms rely on ongoing program launches and technology upgrades. If content, marketing and student-facing tech spending rise faster than tuition or enrollment, margin expansion from current adjusted EBITDA margins near 30.8% could stall, limiting progress in net margins and earnings.
• Chamberlain's recent 1% enrollment decline and weaker post licensure trends show that execution missteps in marketing or funnel conversion can quickly interrupt growth. A slower than hoped recovery in the critical fall cycle would weigh on segment revenue and group earnings.
• Medical and Veterinary schools operate close to capacity, so long-term growth depends on adding new seats and pathways that require significant upfront capital and regulatory approvals. If these projects run over budget or are delayed, margins in the Med/Vet segment and group level earnings could come under pressure.
• Covista is leaning on strong cash generation and a large US$728 million share repurchase authorization while also investing in new capacity and student financing partnerships. If returns on these investments fall short or new lending structures around student loans tighten, free cash flow, net margins and earnings per share could be weaker than investors expect.

Valuation

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

• The assumed bearish price target for Covista is $140.0, which represents up to two standard deviations below the consensus price target of $156.25. This valuation is based on what can be assumed as the expectations of Covista's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 $140.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $2.4 billion, earnings will come to $353.2 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 7.5%.
• Given the current share price of $124.16, the analyst price target of $140.0 is 11.3% 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.