Shares of Bridgepoint Education (NYSE:BPI) hit a 52-week-high Wednesday, and were adding another 6% after Washington just announced good news on regulation of the for-profit education industry. Is this a signal that you should add Bridgepoint to your portfolio?
Bridgepoint is a for-profit educator with $713 million in sales, $128 million in net income and a market capitalization of $1.2 billion. It offers associate’s, bachelor’s, master’s and doctoral programs in business, education, psychology, social sciences and health sciences. It delivers the courses online and in traditional campus programs located in Clinton, Iowa, and Colorado Springs, Colo. At the end of 2010 Bridgepoint offered 1,345 courses, 71 degree programs and 134 specializations with 77,892 students enrolled.
In June 2010, Bridgepoint was on the radar of a hedge fund honcho, Steve Eisman. As I posted then, Eisman expected the shares of companies in the industry to drop because he expected Washington to clamp down on the industry’s abuses. For example, he found evidence that for-profit education companies were engaged in overly aggressive tactics to recruit students who lacked the resources to repay the $21 billion of government loans (up 450% during the Bush Administration), called Title IV funding, that students take to pay for the courses. And these for-profit educators are hugely profitable — earning a five-year average return on equity of 28% — far exceeding the S&P 500 average of 19.4%.
The tactics of the for-profit education industry produced many unhappy students, but since the for-profit educators were not responsible for the loans, they reaped high profits. The result at 400,000-student University of Phoenix was that between 88% and 96% of students did not complete their degrees and could not repay loans that ranged between $100,000 and $200,000 – sticking the government with the problem of collecting, according to Business Insider.
Those sales tactics were indeed appalling. According to a Bridgepoint memo I quoted in my post, “The level of deception is disgusting — and wrong. When someone who can barely afford to live and feed kids as it is, and doesn’t even have the time or education to be able to email [enrolls], they drop out. Then what? Add $20,000 of debt to their problems — what are they gonna do now. They are officially screwed. We know most of these people will drop out, but again, we have quotas and we have no choice.”
Nevertheless, I warned then against shorting the stock because it was unclear whether any regulations would actually change. That turned out to be right — since June 4, 2010 when I wrote my post and Wednesday, Bridgepoint’s stock has risen 20%. If you had shorted the stock then and closed your position today, that would not have been a profitable trade.
What happened is that the for-profit education industry spent $12 million lobbying the Department of Education to take the rough edges off the rules changes, according to the New York Times. The result was much softer-than-expected standards for letting for-profit educators get their hands on taxpayer-funded loans. Now, a for-profit education company gets three chances to comply with the following standards before being cut off from the government gravy train:
- Under 35% of its graduates are repaying student loan principal three years out, and,
- Loan payments are more than 30% of discretionary income more than 12% of total earnings
The Education Department estimated that these rules would only affect a tiny fraction of the for-profit education industry. Specifically, it estimates that 5% of the 13,155 for-profit programs covered by the rules, and 1% of the 42,290 public and nonprofit programs, would lose their eligibility for those government loans.
Based on its stock price response, it looks like the rules will leave Bridgepoint unscathed. Meanwhile, last month the company raised its 2011 forecast for revenue and profit.
Should you add Bridgepoint to your portfolio? To think about that, we can look at its price-to-earnings-to-growth (PEG) ratio — a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company’s earnings to grow. I think a PEG of 1.0 is a fair price, and anything below that is a bargain.
If you believe analysts’ estimates, the answer is no. That’s because, rather than grow, earnings are forecast to decline 1.2% to $2.54 a share in 2012 after rising this year to $2.57 a share.
However, if you’re looking for a reason to buy the stock, it’s worth noting that over the last five quarters, Bridgepoint has beaten expectations by an average of 30.5%. If it does that in 2012, its stock looks cheap at a P/E of 9.2.
If you have a moral aversion to investing in tobacco companies, you probably won’t want to own Bridgepoint shares either. Otherwise, it looks like they’re going to continue rolling uphill.
Peter Cohan has no financial interest in the securities mentioned.