Apollo Group (NASDAQ:APOL), the largest for-profit college chain, and rivals such as Devry (NYSE:DV) and ITT Educational Services (NYSE:ESI) aren’t value traps for investors. They’re death traps.
The industry is reeling from a combination of increased regulatory oversight, shifting demographic trends and slackening demand for job training as the U.S. economy improves. None of these companies seems better suited to weather the downturn than any other. Trends are that bad.
Consider these depressing data points. Enrollment at for-profit institutions has slumped for six straight quarters, and demand for online education is starting to slow. One recent study found that more than 6.1 million students took at least one online class during the fall of 2010. While that represents a 10.1% increase, it’s the smallest rise since 2006.
Enrollment growth at community colleges, a lower-cost alternative to for-profit schools, is slowing as well after spiking more than 20% between 2007 and 2011, according to the American Association of Community Colleges.
“Education stocks are like an auto accident on the interstate … you know you shouldn’t slow down to look, but you can’t help yourself,” writes Piper Jaffray analyst Peter Appert in a note to investors. “Value investors have been tempted multiple times in the past year to call a bottom in the education sector based on historically low multiples, generally strong balance sheets, and the prospect of improving enrollment trends any quarter now. Each time the call has been made, it has been wrong.”
For-profit schools have a huge image problem. Various media reports have accused the industry of preying on vulnerable students by charging them exorbitant tuition to train for careers that don’t pay enough money to enable students to pay back their loans.
A report released this summer by Sen. Tom Harkin (D-Iowa) found that through federal student loans, taxpayers spent $32 billion in the most recent year on companies that operate for-profit colleges. Most students leave without graduating. The bad publicity, which the industry argues is unfair, is also helping drive away students.
Take Apollo, the parent of the University of Phoenix. In fiscal 2012, average degree-program enrollment fell 14.8%. Its plan to shutter 115 locations and fire 800 workers is hardly a shock. Total student enrollment at ITT Educational Services dropped 15.7%. The picture was the same at DeVry, where the total number of online undergraduate and graduate course takers in the May session fell 11.6%.
One potential silver lining for investors could be that the declining stock prices may lead to a wave of industry consolidation. Some private equity players may be drawn to the sector because these companies produce impressive cash flow and have modest capital spending requirements, according to Appert.
The industry, though, has got to do a better job rooting out bad actors if it hopes to attract attention from investors.
Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr
