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small-cap

Two Exciting Small-Cap Plays – PRDO, MESA

Jun 10, 2021 | Team Kalkine
Two Exciting Small-Cap Plays – PRDO, MESA

Perdoceo Education Corporation

PRDO Details

Perdoceo Education Corporation (NASDAQ: PRDO) offers primarily online post-secondary education to a diverse student population, along with campus-based and blended learning programs. The company’s accredited institutions include the Colorado Technical University (CTU) and the American InterContinental University System (AIU), which provide industry-relevant and career-focused degree programs. As of June 09, 2021, the company’s market capitalization stood at USD 889.66 million.

FY20 Student Enrollment (Source: Investor Presentation, March 2021)

Q1FY21 Results: The company reported a slight decline of 7.39% in net revenue to USD 183.64 million in Q1FY21 (ending March 31, 2021) as compared to USD 170.99 million in Q1FY20. 57.62% of the total revenue was generated from the CTU segment during Q1FY21. However, net income for Q1FY21 increased to USD 30.75 million from USD 29.11 million reported in Q1FY20.

Key Risks: The company derives a substantial portion of its revenue and cash flows from Title IV programs, which assist students in financing their education. Around 74% of all PRDO’s students during FY20 participated in Title IV programs. As a result, any reduction in the program funding or the ability of the students to participate in the program could materially reduce the number of student enrollments, revenue, and profitability of the company. In addition, since PRDO’s institutions are primarily online-based, any failure in the information technology system whether through malicious activity or technological error could negatively impact its brand name and financial position.

Outlook:

Q2FY21 & FY21 Outlook (Source: Company Press Release, June 05, 2021)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

 (Data Source: REFINITIV, Analysis by Kalkine Group)

  • % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

PRDO Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: PRDO stock slumped 27.14% in the past 12 months and is currently leaning towards the lower end of the 52-week range of USD 10.62 to USD 17.71. The stock is currently trading close to its 200 DMA level. On the technical chart, the next support level is USD 11.16. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 14.68. Considering the correction in the stock price in the past 12 months, demand for online education, decent financials, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 12.59, down by 0.32% as of June 09, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

Mesa Air Group, Inc.

MESA Details

Mesa Air Group, Inc. (NASDAQ: MESA) operates as the holding company for Mesa Airlines, Inc., a regional air carrier that provides scheduled passenger services in the US, Bahamas, and Mexico, and cargo services out of Cincinnati / Northern Kentucky International Airport in the US. The company currently operates a fleet of 160 aircraft under the terms of capacity purchase agreements with American Airlines, United Airlines, and DHL Express. As of June 09, 2021, the company’s market capitalization stood at USD 331.30 million.

Resurgence in Operating Performance: On June 08, 2021, the company reported a 134% YoY increase in block hours to 28,264 in May 2021 because of increased flying due to industry recovery from the COVID-19 pandemic. This followed a similar uptick in April 2021.

Eyeing International Growth: On March 02, 2021, the company signed an agreement with London-based Gramercy Associates Ltd. to develop a Europe-based joint venture which will apply for a new Air Operator's Certificate (AOC) in the European Union using the CRJ-900 aircraft. The goal of the JV is to introduce a CPA (Capacity Purchase Agreement) and ACMI (Aircraft, Crew, Maintenance, and Insurance) in passenger or cargo services in Europe. MESA will own 49% of the JV once the AOC is obtained.

Q2FY21 Results: The company reported a sharp decline of 46% in total operating revenues to USD 97.28 million in Q2FY21 (ending March 31, 2021) as compared to USD 179.90 million in Q2FY20. However, net income for Q2FY21 was USD 5.69 million, 201.8% higher than USD 1.88 million in Q2FY20, due primarily to the recognition of a government grant of USD 55.97 million under the Payroll Support Program Extension (PSP2), which was offset against operating expenses for Q2FY21.

Key Risks: The company derives most of its operating revenue from its capacity purchase agreements with American Airlines (45% in Q2FY21) and United Airlines (53%). Termination of either agreement could have a material adverse effect on MESA’s business. Moreover, the company has high leverage and significant long-term lease obligations relating to its airline fleet, which may affect its ability to raise additional capital on acceptable terms or at all.

Outlook: Forward Guidance (Source: Company Press Release, May 10, 2021)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: REFINITIV, Analysis by Kalkine Group)

  • % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

MESA Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: MESA stock fell 42.16% in the past 3 months and is currently at the mid-point of the 52-week range of USD 2.80 to USD 17.40. The stock is currently trading slightly above its 200 DMA level. On the technical chart, the next support level is USD 8.19. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 11.49. Considering the correction in the stock price in the past 3 months, international growth initiatives, current trading levels, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 9.59, up by 3.34% as of June 09, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.