What a time it’s been for Adtalem. In the past six months alone, the company’s stock price has increased by a massive 40.6%, reaching $128.03 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Adtalem, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Adtalem Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Adtalem. Here are three reasons why ATGE doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Adtalem grew its sales at a 10.5% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Adtalem’s revenue to rise by 6.4%, a deceleration versus its 10.5% annualized growth for the past five years. This projection doesn't excite us and implies its products and services will see some demand headwinds.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Adtalem historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.7%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
Final Judgment
Adtalem’s business quality ultimately falls short of our standards. After the recent rally, the stock trades at 18.5× forward P/E (or $128.03 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Adtalem
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