National American University Holdngs Inc (NASDAQ:NAUH) may well be the most hated name in the most hated industry in the US–for-profit education–the bête noire for every value investor over the last 3 years. We’ve (almost) all bought them and lost money. I think it’s time for another look at the industry, and the name I like best is NAUH. At an acquirer’s multiple of 4.25, it’s the third cheapest name in the Small and Micro Cap Screener. It’s cheap because it’s in for-profit education, sales are down yoy and the CFO resigned March 23. NAUH has a $77 million market cap, a $51 million enterprise value, and generated $12 million in operating earnings (TTM), up 100 percent from $6 million over the prior twelve months. It pays a 0.045 per share quarterly dividend for shareholders of record on June 30, which equates to a 5.9 percent yield. Covering the dividend is no problem. It generated $18.8 million in net cash from operating activities for the nine months ended February 28, 2015 (the quarterly dividend costs $1.1 million), and it’s very liquid: At February 28, 2015, cash, cash equivalents and marketable securities were $38.5 million, and the quarterly dividend. The company can keep meeting those dividend payments, but it should put that cash to work either buying back stock or paying a special dividend.

NAUH is a regionally accredited institution of higher learning offering associate, bachelor’s, master’s and doctoral degree programs in business-related disciplines, such as accounting, management, business administration and information technology, and in healthcare-related disciplines, such as nursing and healthcare management. Courses are offered through educational sites as well as online. In August 2013, NAUH was approved by the Higher Learning Commission to offer an Education Doctorate (Ed.D.) in Community College Leadership, which is offered in Austin, Texas. Operations include 37 locations located in Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota and Texas; distance learning service centers in Indiana and Texas; and distance learning operations and central administration offices in Rapid City, South Dakota.

As of February 28, 2015, NAUH had enrolled 1,849 students in courses at its physical locations, 6,212 students for its online programs, and 1,534 students at its hybrid learning centers that attended physical campus locations and also took classes online.  NAUH supports the instruction of 2,000 additional students at affiliated institutions for which NAUH provides online course hosting and technical assistance. NAUH provides courseware development, technical support and online class hosting services to various colleges, technical schools and training institutions in the United States and Canada that do not have the capacity to develop and operate their own in-house online curriculum for their students. NAU does not share revenues with these institutions, but rather charges a fee for its services, enabling it to generate additional revenue by leveraging its current online program infrastructure.

The real estate operations consist of apartment facilities, condominiums and other real estate holdings in Rapid City, South Dakota. The real estate operations generated less than 1.0% of our revenues for the quarter ended February 28, 2015.

The big issue for all of the for-profit education providers is compliance with new legislation. NAUH spills a lot of ink without indicating whether they will comply or not. Here is management’s lengthy non-disclosure:

Compliance Reviews

From August 18, 2014 to August 22, 2014, the U.S. Department of Education conducted a program review of our administration of Title IV programs for the 2013-2014 award year, as well as our administration of the Clery Act and related regulations and our compliance with the Drug-Free Schools and Communities Act and related regulations. The on-site activities of the program review occurred at our Rapid City and Lee’s Summit campuses. The Department issued its preliminary program review report on November 5, 2014, containing findings and requesting additional information with respect to our implementation of requirements for returns of Title IV funds for withdrawn students, measurement of students’ satisfactory academic progress, verification of student eligibility for federal student aid, gainful employment program information disclosures, and enrollment data reporting.  We responded to the Department’s preliminary findings and information requests on March 10, 2015.  We are unable to predict whether the Department will request additional information in connection with this matter or when it will issue its final program review determination.  If the Department’s final program review determination were to include significant findings of non-compliance with Title IV program requirements, it could have a material effect on our business, condition and results of operations.

On November 21, 2014, the U.S. Department of Education notified NAU of its final audit determination with respect to the Title IV compliance audit for the period June 1, 2012 through May 31, 2013.  The final audit determination asserts that NAU improperly disbursed Title IV program funds to students at the Wichita West campus location before it was approved as an additional location for Title IV program participation requirements by the Department in August 2013.   This resulted in a requirement to return approximately $664 in Title IV funds and assessed interest to the Department.  The Company has recorded this amount as a return of previously recorded revenue. This amount was timely remitted during the three months ended February 28, 2015 and is shown as a direct reduction of academic revenue during the nine months ended February 28, 2015.

We have been institutionally accredited since 1985 by the Higher Learning Commission (“HLC”), a regional accrediting commission recognized by the Department. Our accreditation was last reaffirmed in 2008 for the maximum term of 10 years as part of a regularly scheduled reaffirmation process. In May 2010, a three-person team from the HLC visited our central administration offices in Rapid City, South Dakota, in response to the university’s change of control request in connection with the November 2009 merger with Camden Learning Corporation. The change of control request was approved with a visit scheduled in 2014-15. On September 22-26, 2014, we hosted a comprehensive accreditation review team visit.  On January 30, 2015, NAU was notified that our accreditation had been reaffirmed by the Institutional Actions Council of the HLC, effective January 26, 2015, for a period of 10 years.

Department of Education Rulemaking

On October 23, 2014, the Department published final regulations regarding the definition of “adverse credit” for borrowers of certain loans.  On October 20, 2014, the Department also published final regulations addressing topics related to, among other things, the scope of campus crime statistics that Title IV participating institutions are required to distribute to current and prospective students and employees.  These final regulations will be effective on July 1, 2015.

On October 31, 2014, the Department published final regulations to define whether certain educational programs, including all programs offered by NAU, comply with the Higher Education Act’s requirement of preparing students for “gainful employment” in a recognized occupation.  The final gainful regulations require each educational program offered by proprietary institutions to achieve threshold rates in two debt measure categories: an annual debt-to-annual earnings (“DTE”) ratio and an annual debt-to-discretionary income (“DTI”) ratio. The final regulations eliminate the debt measure category related to program cohort default rates that was contained in the proposed regulations.

The various formulas are calculated under complex methodologies and definitions outlined in the final regulations and, in some cases, are based on data that may not be readily accessible to institutions.  The DTE ratio is calculated by comparing (i) the annual loan payment required on the median student loan debt incurred by students receiving Title IV Program funds who completed a particular program and (ii) the higher of the mean or median of those students’ annual earnings approximately two to four years after they graduate, to arrive at a percentage rate.  The DTI rate is calculated by comparing (x) the annual loan payment required on the median student loan debt incurred by students receiving Title IV Program funds who completed a particular program and (y) the higher of the mean or median of those students’ discretionary income approximately two to four years after they graduate to arrive at a percentage rate. The Department receives the earnings data used to calculate these ratios from the Social Security Administration (“SSA”), but institutions do not have access to the SSA earnings information.

The final regulations outline various scenarios under which programs could lose Title IV eligibility for failure to achieve threshold ratios over certain periods of time.  A program must achieve a DTE ratio at or below 8%, or a DTI ratio at or below 20%, to be considered “passing.”  A program with a DTE rate greater than 8% but less than or equal to 12%, or a DTI rate greater than 20% but less than or equal to 30%, is considered “in the zone.”  A program with a DTE rate greater than 12% and a DTI rate greater than 30% is considered “failing.”  A program will cease to be eligible for students to receive Title IV Program funds if its DTE and DTI ratios are failing in two out of any three consecutive award years or if both of those rates are either failing or in the zone for four consecutive award years for which the Department calculates debt-to earnings rates.

The final regulations also require an institution to provide warnings to current and prospective students in programs which may lose Title IV eligibility at the end of an award or fiscal year.  If a program could become ineligible for students to use Title IV Program funds based on its ratios for the next award year, which could occur based on the program’s DTE ratios for a single year, the institution must: (1) deliver a warning to current and prospective students in that program at the prescribed time and by a prescribed method which, among other things, states that students may not be able to use Title IV Program funds to attend or continue to attend the program (“Warning”); and  (2) not enroll, register or enter into a financial commitment with a prospective student in the program, until three business days after (a) a Warning is provided to the prospective student or (b) a subsequent Warning is provided to the prospective student, if more than 30 days have passed since the Warning was first provided to the prospective student.

If a program becomes ineligible for students to use Title IV Program funds, the institution cannot seek to reestablish the eligibility of that program, or establish the eligibility of a similar program, based on having a classification of instructional program (“CIP”) code that has the same first four digits as the CIP code of the ineligible program, until three years following the date on which the program became ineligible.

In addition, among other requirements, the final regulations impose extensive reporting and disclosure obligations on institutions offering gainful employment programs.  The final regulations will be effective on July 1, 2015.

We are in the process of evaluating the effect of the final gainful employment regulations and the other new regulations on us.  While we cannot predict with certainty what impact the final gainful employment regulations will have on our business, compliance with the final regulations could increase our cost of doing business, reduce our enrollments and have a material adverse effect on our business, financial condition, results of operations and cash flows.

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