Archipelago Learning's IPO Valuation Favors K12

Archipelago goes public on Thursday. The company intends to raise $100 Million, with shares coming approximately one-half from the company and the remainder from selling private equity companies. At the mid point of the anticipated offering, ARCL will be valued at $400 Million.

Providence Equity Partners bought the company in January, 2007 for approximately $85 million and owns 77 percent. Founded in 2000, the company had sales of $42 Million over the past 12 months. Earnings for the nine months ended September 30 were $6.9 Million while the net profit for the prior year was $1 million. ARCL has been growing their student enrollment and has recently enterd the high school market. Their business is basically internet based test preparation.

At $42 Million of revenue, and a market capitaization of $400 Million, the company is being valued at 10 times sales! The P/E of last year's earnings is 400! Interim results are up considerably, however I haven't delved into the makeup of the improved earnings.

K12 is a similar internet based marketer of lessons and test prep. Its market cap is a mere $550 Million and has trailing 12 month revenue of $330 Million or a P/S of 1.6, not 10. LRN trades at a forward P/E of 24, high but not the 400 or 40, depending on the time period, of ARCL. Both feature the cost savings of the internet, face state education cost pressures, but appear to be able to outgrow the reimbursement reductions. K12 projects earnings growth of 20 percent for 2010.

Today, after the ARCL IPO announcement, K12 increased $.71. I believe it will continue to move upward as investors compare the two companies. An investment in LRN garners a company that has more scale than Archipelago and excellent growth opportunities for a lesser, comparable valuation.

William Kabourek owns shares of K12