Companies that have a record of compounding shareholder equity at a rate of 20% or more per annum are rare, and those that do exist tend to command a high valuation. However, Nicoya Capital believes it has found a hidden gem with Nelnet, an unknown compounder diversified solutions business company trading below book value and at an earnings multiple of less than 10x.
Nicoya presented Nelnet at last month’s Valuex Vail conference.
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Diversified Solutions Business With 100% Upside?
Nelnet is an education-focused finance and services company, which was founded in 1996 to service federal student debt. Since 2010 this core business has been in run off, but management has acquired several other companies to help continue growth. These bolt-on businesses now generate $880 million of revenue and $80 of EBITDA – so they’re not insignificant.
Since becoming a public company in 2003, Nelnet has compounded book value at a rate of 20% per annum through 2016.
Nelnet is a collection of business all of which offer value, but due to the complex nature of the group, it’s difficult to evaluate the business overall. The two most important parts are the asset generation business, which has historically issued loans under the Federal Family Education Loan Program but is now in a runoff. Over the next seven years, 80% of this portfolio’s cash flows will be generated as it runs down producing an estimated undiscounted cash flow stream amounting to $48 per share. With this asset generating a steady cash stream, Nelnet has the firepower to grow, and one of the company’s growth avenues is its Diversified Solutions business.
The Diversified Solutions business is currently one of three finalists in the running to win a Department of Education contract to manage a platform designed to manage the entire Federal Direct Program, the largest pool of government student loans -- one of the most valuable non-military government contracts in history.
The third most significant value creator for Nelnet is its Business Solutions arm. Nelnet Business Solutions sells management software to schools and is the market leader with over 13,000 schools and 3,000,000 students. Revenue has already grown from $24 million in 2005 to $126 million for 2016 and continues to have a long runway according to Nicoya.
These three divisions could be worth an estimated $3 billion according to Nicoya’s sum-of-the-parts valuation in the base case. Adding in other non-core divisions gives a base case book value of $79.50 per share, nearly 100% above current levels.