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

Lower enrollments, tougher regulations create headwinds for the sector

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

Pass: Strayer Education

Strayer Education (STRA) landed in detention after its earnings release last week, sinking 23% on news that its third-quarter EPS of 30 cents beat analysts’ 5-cent forecast.

It’s not entirely irrational — after all, revenue and earnings did decline year-over-year, and enrollment fell by 17%.  What spooked investors most, however, was the announcement of a plan to cut tuition by 20%, close 20 physical locations and reduce its workforce by 20%.

Although tuition cuts are unwelcome to investors and the markets have sneered at the strategy, Strayer is my contrarian bet for three reasons: Corporate training and graduate programs remain a valuable niche. Plus, STRA has not run afoul of state or federal regulators, which has been the bane of some rivals. And the market’s knee-jerk reaction makes its valuation particularly tempting — it’s trading near 52-week lows now. With a market cap of $478 million, STR has a PEG ratio of just 0.73 — indicating that the stock is undervalued.

Fail: Corinthian Colleges

Shares of Corinthian Colleges (COCO) closed dropped 5% on Tuesday after reporting a wider-than-expected quarterly loss. Corinthian lost 9 cents per share, while analysts had expected a 7-cent loss.

With revenue and enrollments down, the company revised its fiscal 2014 guidance downward.

It has been a tough month for Corinthian, particularly after California Attorney General Kamala Harris filed suit against the company, alleging “predatory” and deceptive marketing tactics that misrepresented employment rates. The Securities and Exchange Commission began a probe into its recruitment practices in June.

Although COCO has one of the lowest forward P/E ratios in the sector at 9, it has a PEG ratio of 1.45, indicating it may be overvalued. Its market cap of just $176 million and share price of around $2 make it look a little risky — and volatile, with a comparatively high beta of more than 3.

Fail: Education Management Corp.

Shares of Education Management Corp. (EDMC) took a hit last week as the company reported an 8-cent a share loss and declining enrollment. Tuesday’s earnings releases in the for-profit education sector gave investors another reason to short the stock, which closed down more than 6%.

Education Management is making some changes to adapt to the tough market. Nearly 500 employees received pink slips last month as part of the company’s cost-cutting measures. EDMC also hired Robert Hrivnak as controller and chief accounting officer, to keep a firm eye on costs.

Still, the company has a long way to go to counter the Justice Department’s characterization of it as a poster child for what’s wrong with the for-profit education sector. Management can turn realities and perceptions around, of course, but my biggest problem is with EDMC’s valuation. With a market cap of nearly $1.6 billion, EDMC has a PEG ratio of 4.4, which indicates it’s overbought — as does the fact that it’s trading at a whopping 35 times forward earnings.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.


Article printed from InvestorPlace Media, http://investorplace.com/2013/11/profit-education-stocks-2-pass-2-flunk/.

©2014 InvestorPlace Media, LLC

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