For the last five years, Grand Canyon University has been building a reputation in the postsecondary online education space. The Phoenix, AZ-based school, with roots dating back to its formation in 1949 as a Baptist college, fell upon troubled financial times earlier this decade, and was rescued from near bankruptcy by an education entrepreneur in 2004. The new ownership group built an extensive online course offering set and implemented aggressive sales and marketing initiatives, which fostered rapid student enrollment growth. Riding a wave of investor interest in the countercyclical education sector, Grand Canyon hopes to stem the tide of recent IPO inactivity and complete the first deal in the US since early August.

Fundamental Foundation

Grand Canyon's enrollments have more than doubled since the end of 2006 to 22,000 students, 88% of whom are online. The school has benefited in recent years as more adults have recognized the benefits and convenience of an online education, and 92% of Grand Canyon's current online enrollments are adults over the age of 25. Grand Canyon's focus on the education, business and healthcare sectors has also helped fuel growth as these are three of the most popular postsecondary education fields. Financially, Grand Canyon benefits from its scalable business model, which supports strong free cash flow and a high level of profitability.

Follow the Leader

One of the finest selling points of the deal is the recent introduction of former Apollo Group executive Brian Mueller as the company's CEO. With twenty years' experience at Apollo Group, Mueller was instrumental in growing its online segment, the University of Phoenix Online, into the premier name in the online education space. Several other top executives also joined Grand Canyon with Mueller, and while the team is new to Grand Canyon, the executives are familiar faces to investors in the space and bring much needed public company experience.

Things to Keep in Mind

Although Grand Canyon's enrollment growth has been impressive, it has not come without a cost. The firm has spent very aggressively on sales and marketing, whose expenses have increased from 28% of sales in 2006 to 40% for the last twelve months. We expect that the firm will leverage these costs over the long run, however, we believe that these expenses will continue to weigh on margins for the near term. The university also relies heavily on government-sponsored financial aid (Title IV), and any changes to the program's financial requirements or funding levels could impact Grand Canyon's results. There are also two ongoing litigation cases, of which the outcome of one could hurt the firm's eligibility for Title IV funding.

Conclusion

Despite Grand Canyon's positive fundamental story and reputable new management team, at the end of the day the deal's success will come down to price. Conditions in the equity markets remain rough, and Grand Canyon is trying to end the longest drought in US IPO activity since 1975. While the company's spot in an attractive growing market will turn some heads, investors may pressure the underwriters on price given the broader market conditions.

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