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

by Susan J. Aluise | November 6, 2013 5:49 pm

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[1]), 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[2]), 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.

Pass: Strayer Education

Strayer Education (STRA[3]) 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[4]) 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[5] 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[6]) 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.

  1. APOL:
  2. APEI:
  3. STRA:
  4. COCO:
  5. revised its fiscal 2014 guidance:
  6. EDMC:

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