Why is this stock up 90% this year?

G8 Education (ASX: GEM) has risen 90% this year, and over 600% since mid-2011, due to rapidly rising profits and a successful acquisition strategy. On Wednesday, G8 released its results for the first six months of calendar year 2013.

It reported a terrific 51% rise in revenue, and 62% rise in profits compared to the corresponding period in 2012. The market was somewhat nonplussed by the result, sending the shares up only 0.70% on Wednesday, as the company forecast a strong profit result in an upgrade in July. The stock is up 10% since the upgrade on July 17.

G8 is one of only a handful of education-related stocks on the ASX. It owns and operates a network of child care centres in Australia (187 centres) and Singapore (18 centres), and has pursued an aggressive expansion strategy in recent years, capitalising on the failure of competitor ABC Learning Centres. G8 noted that the 33 new centres acquired during the 2012 financial year underpinned the strong result, and that it had purchased 22 more in the first half of 2013.

The company has been able to successfully grow the business and profits together, due to the strict guidelines it uses when purchasing new centres. G8 pays four times the annual earnings before interest and tax (EBIT) for the centre and ensures that it is EBIT-accreditive upon settlement. This equates to making sure the centres are purchased at the right price and are profitable, but not deviating from the formula means that G8 can continue to grow quickly and safely.

In considering the outlook for the rest of 2013, G8 reminded shareholders that childcare follows a regular, seasonal pattern. Profit in the first half is always less than the second, as more children transition to school in the first half, and new enrolments pick up in the second half. Consequently, it is expected that G8 will register sharply higher profits again in the second half of 2013, and a strong overall 2013 result. The split between first and second half profit has traditionally been around 40%-60%.

In another benefit to shareholders, the profit increase allowed G8 to announce an increase in the group’s dividend by 50%, from 8 to 12 cents per share annually. This corresponds to a yield of 4.2%, fully franked.

Foolish takeaway

G8 Education is rapidly expanding its business and profits, which has resulted in the share price rising strongly in the past 24 months. The company is continuing to acquire new childcare centres under a standard and proven formula that should see G8 report a big rise in yearly profit at the end of 2013.

The share price should be supported in the medium term by the rising dividend yield and the promise of strong growth through acquisitions. Investors searching for a company with strong growth prospects should consider G8 for an investment over the medium term.

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Motley Fool contributor Andrew Mudie owns shares in G8 Education.

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