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For-Profit Education Stocks: 2 That Pass, 2 That Fail

Lower enrollments, tougher regulations create headwinds for the sector

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Although the for-profit education sector’s performance this year hasn’t been bad — some stocks are even trading near 52-week highs — lower enrollments and more stringent federal regulations threaten to give some stocks a failing grade.

First the good news: The for-profit education sector has racked up double-digit gains over the past month, buoyed by the broader market’s bullish sentiments and a fresh focus on cost control.

The bad news: Even the sector’s largest player, University of Phoenix parent Apollo Group (APOL), is struggling with lower enrollments and earnings. APOL’s degree enrollment and revenue both fell by 18% in the most recent quarter. The company’s aggressive cost cuts and restructuring initiatives bailed out the quarter’s profit, but guidance for fiscal 2014 is soft.

Which for-profit schools will survive? Here are two stocks in the for-profit education sector that make a passing grade, and two that flunk out.

Pass: American Public Education

American Public Education (APEI), which offers programs targeted toward a government and military audience, beat the Street on both the top and bottom lines when it reported third quarter earnings after market close on Tuesday. Earnings increased by a penny to 61 cents per share, beating Wall Street estimates by 5 cents, while revenues grew 6% to $81.8 million — better than the expected $79.7 million.

More good news: Overall, net course registrations increased to approximately 105,200 in the third quarter of 2013, a year-over-year increase of 2%; however, net course registrations by new students were down by about 8% compared to the same quarter last year.

APEI guided downward for the fourth quarter, in part because the federal government shutdown put a temporary halt on the Defense Department’s tuition assistance program. That, and broader market trends, should bring fourth-quarter net income down to about 50 or 54 cents per share; revenue could be 5% to 9% lower.

That said, there are several things I like about this company: It’s still making money, it’s not in the regulatory dog house, its focus on a government-military population through American Public University System and Hondros College systems is a plus, and it has an attractive valuation — a price to earnings growth ratio of 1 and a forward P/E of 14.6.

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