Warning: The following column is about a microcap company. Microcaps by definition can be illiquid and experience wild gyrations. It is important to do your own due diligence, rely on your own research and understand that microcaps can be very volatile. Please proceed reading using your highest levels of caution. That being said…
If Lincoln Educational Systems (NASDAQ: LINC) doesn’t increase its cash flow by at least five times in value over the next three years, I will know the following:
1. Congress failed to pass a significant infrastructure spending bill
2. Zero new factories were built in the U.S.
3. Zero new manufacturing jobs were created or came back to the U.S.
4. Baby Boomers will not need more nurses and caregivers as they age
5. 30 million unemployed people all went back to work, except in the industries where they are most needed
What is Lincoln Educational Systems
LINC is a private technical school that teaches welding, electrical, HVAC, automotive tech and nursing to over 11,000 students a year. The company boasts a 70% graduation rate, and an over 80% job placement rate (which handily beats community colleges).
Despite the obvious need for skilled labor, in the past few years LINC has struggled mightily to recruit students. Who wants to go to technical school when the economy is so strong? In 2010, LINC had 18,000 annual students. Today, LINC’s campuses are only 40% occupied. The company has suffered trying to figure out how to be profitable and successful while struggling to attract students.
The COVID pandemic has pulverized our economy and there are now over 30 million unemployed. Many hospitality, restaurant and tourism jobs may simply never be coming back. Historically, this has meant large numbers of people going back to school to gain skills they need to get a good paying job.
The Shortage of Skilled Labor
As I discussed in the last newsletter(ANGI's Plumber Problem) the U.S. has a pretty dramatic shortage of skilled labor. I wrote mainly about the short supply of plumbers, but it is the same for welders, electricians, automotive technicians, nurses, and more.
The shortage of skilled workers is manifesting itself in higher salaries. The average pay for a welder is over $42,000 per year, a diesel automotive technician makes over $50,000 per year and the average electrician makes over $55,000 per year. Consider that the average office worker salary is $37,000 per year.
Another example of the shortage of skilled workers is that companies such as Terex Corporation (NYSE: TEX) is willing to give LINC $110,000 worth of training equipment for free in order to encourage students to become diesel technicians and come work for the company afterwards (Terex Free Equipment Announcement).
What is driving this shortage? For years people have been encouraged to go to four-year colleges instead of learning a trade or technical skill. And as more manufacturing jobs have gone overseas, we have frowned upon these core “blue collar” jobs that were previously the backbone of the country. This has led to fewer and fewer people becoming “skilled.” This is a big problem if we ever want to build in America again.
An Infrastructure Bill and China Are All Tailwinds
With both political parties now talking about infrastructure spending bills, I don’t care if it is the Trump Highway and Bridge Bill or the Green New Deal, we are going to need welders, skilled construction crews, electricians, and more. Add in so many boomers retiring and there is a need for a massive increase in technical training. How do we implement a $1+ trillion infrastructure bill when the average age of a welder is 55?
Then add in the “slow burn” economic battle with China that is heating up. The main focus has been around technology companies and the theft of IP. COVID has illuminated the risk to supply chains and how dependent we are on China for manufacturing. How do we realistically bring back factories and manufacturing if we don’t have enough skilled people to do the work?
LINC’s Cash Flow Could Explode Higher
What does all this mean financially for LINC? Despite trailing twelve-month revenues of $280 million, LINC has only been able convert that into approximately $15 million of cash flow. The result is that investors don’t really place much value in its business as its fully diluted market cap including its convertible preferred is only a paltry $165 million (31 million fully diluted shares outstanding).
But it wasn’t always this way. In 2010, LINC traded at almost $27 per share when its enrollment was 18,000 students and it was earning $80 million in cash flow. Management has recently said that 40 cents of every additional revenue dollar from here drops to the bottom line. They have cited the $80 million as an achievable target. For reference, that is $2.58 per diluted share of cash flow on a $5 stock.
Since those big years, LINC has gone through some tough times, has become more efficient, cleaned up its balance sheet and is now in a better position. The company has the opportunity to expand geographically and add a nursing program expansion in New Jersey in the future. With the company now running a more efficient organization, it wouldn’t be a crazy assumption to think the company’s cash flow could approach $100 million in two to three years.
What valuation multiple could LINC trade at? Let’s say I’m wrong and cash flow only rises to $50 million, and let’s assume a very low valuation of five times that cash flow. The stock would trade at $8 per share, 50% higher than its current share price. And if the bullish scenario comes in and the stock sells at a healthier valuation of 8 times $100 million of cash flow? The stock would be worth more than $25 per share, almost 400% higher than its current price.
What will the future bring? I’m not exactly sure, but it makes sense for the unemployed and our country to be pumping out a lot more skilled labor in the future, and LINC is a prime beneficiary of that scenario. I would argue that the success of LINC and other technical colleges are more important to our country’s future than the big tech companies. LINC’s success should be a big win for our country and for investors.
P.S. As with many microcaps, LINC has been volatile, recently going on a big run that might have to do with Biden’s new plan to add 140,000 new home health care people as part of his elder care plan (Biden Care Giver Plan). It might also be that others are figuring out that the company is poised for substantial gains in the future.