One For-Profit School Is Worth Scraping Off the Bottom

by James Brumley | January 16, 2013 8:50 am

For-profit schools are under a lot of fire right now, from several directions. As a whole, these stocks are down more than 70% since their early 2010 peak when the Department of Education started to float talk of cutting student loans for attendees of these institutions. The reason? Too many graduates of most of these programs weren’t repaying their loans.

Then again, too many of these graduates weren’t gainfully employed either, calling into question the value of these for-profit degrees and certifications.

Nothing lasts forever, though … even pain. Eventually, industries shrink or expand to the right size (the size that actual demand can support). Unfortunately for the for-profit schools, Apollo Group (NASDAQ:APOL[1]) reminded us last week just how much trouble this industry is in.

But one has to wonder: Are any of these stocks diamonds in the rough?

Worse Than the Numbers Say

At this point, earnings aren’t even part of the concern for Apollo, which is better known for its primary brand, University of Phoenix. Success is measured only on revenue and enrollment, both of which slumped (again) last quarter. Revenue was off by 11% on a year-over-year basis, while enrollment fell 15%.

The weakness is just a segment in a long string of deterioration. Revenue has actually been falling for a couple of years, from $4.91 billion in 2010 to $4.25 billion last year. Per-share earnings have slumped, too, though not for as long — 2011’s EPS of $4.04 was actually a record, but income fell to a four-year low of $3.45 in fiscal 2012.

Truth be told, the numbers themselves aren’t miserable, especially given the media’s dire predictions for the industry. It’s what’s not in the numbers that suggests the two-year, 70% selloff still might not be enough.

Apollo Group might be on the verge of losing its accreditation from the Higher Learning Commission, which is concerned with the sharp declines in the number of full-time faculty, as well as the rising student/faculty ratio.

Simultaneously, the school’s title IV certification is in jeopardy, which could mean the Department of Education nixes student loans for those students attending one of the company’s programs. Broadly speaking, the DOE is starting to ask why so many former Apollo students aren’t repaying their government loans — one of the criteria used to make loan money available in the first place.

An Epidemic

It’s not just Apollo/University of Phoenix in a bind here. Corinthian Colleges (NASDAQ:COCO[2]), Washington Post‘s (NYSE:WPO[3]) Kaplan University and Career Education (NASDAQ:CECO[4]) are among several for-profit schools that are on the chopping block thanks to waning enrollment, questionable value and unemployed graduates. Corinthian’s former students with student loans are defaulting at a rate of nearly 29%. Kaplan’s and Career Education’s aren’t much better.

In fact, the average default rate from for-profit graduates three years after leaving their respective programs is just a tad under 23%. For contrast, the national nonprofit school loan default rate is 11%.

So what? It matters, because the federal government mandates that if 25% of a particular school’s former students that had government loans are in default for three years in a row, that for-profit educator loses eligibility for student loans for two years.

It’s the kind of thing that could drive the nail in the coffin of an already-struggling school — which most of them are.

One Exception?

What’s interesting about the dilemma is that it’s so straightforward: If these for-profit schools were actually helping students get better jobs, their former students might be able to repay those loans and keep their alma maters certified as loan-eligible. Unfortunately, employers just aren’t hiring these graduates, as they don’t quite have the right skill sets or knowledge base that raw experience provides. Plus, many for-profit school degrees don’t carry the same level of credibility as a nonprofit college or university offers.

There are exceptions, however. Schools that teach a particularly difficult skill and/or grant a certificate above and beyond one the school simply fabricated might actually stand a chance. DeVry (NYSE:DV[5]) is one of those exceptions, in that it gives its students a practical skill set rather than theory and philosophy.

Perhaps best known for its engineering and technology curriculum, DeVry also is one of the nation’s major producers of degreed law enforcement personnel and nurses. Through an acquisition from 2005, DeVry’s Chamberlain division is currently training more than 12,000 nurses, giving them skills and degrees that are not only in demand, but highly marketable. In fact, 28% of DeVry’s total enrollment is made up of students seeking healthcare training — an industry that’s anything but cyclical[6].

That’s not to say DeVry is bulletproof. It also offers arts-based programs (nearly half of its students are in business programs), and it also relies on government loans to keep its enrollment steady — as such, it faces the same risks as other names in the group. But CEO Daniel Hamburger has had his finger on the pulse of the industry’s practicality problems for a while, and has successfully navigated through most of the regulatory storm … even if earnings had to suffer[7] to make it happen.

For DeVry, there’s a light at the end of the tunnel that other for-profits can’t see yet. It still will take fortitude to own it, but it’s the proverbial baby the market threw out with the bathwater.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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