For-profit educators have been coming under increased regulatory scrutiny in recent years, and one of them in particular is in the hot seat. ITT Educational Services, Inc. (ESI) received a letter from the Department of Education on Monday demanding that it has $123 million in case its schools are forced to shut down.
Fellow for-profit education stocks like Strayer Education Inc (STRA) and DeVry Education Group Inc (DV) are feeling the market’s wrath, as both struggle with declining profits and revenues and DeVry deals with a Federal Trade Commission lawsuit.
But with ESI stock in the news today, let’s take a look at its woes first.
ESI: Show Me the Money!
ITT Educational Services will have to argue before its accrediting agency later this summer about why, with 19 state attorneys and two federal agencies looking into it for deceptive marketing and recruiting strategies, it should remain an accredited tertiary institution.
If it loses its accreditation, ESI will no longer be allowed to receive student loan funds, which make up 80% of its revenue. That would clearly devastate its business and force it to become insolvent, as its former peer Corinthian did last year.
In the case that ESI goes into bankruptcy, the DOE wants to make sure the company has a letter of credit for at least 20% of the federal funds it received last year, or $123.7 million.
ESI stock is down nearly 12% on the news today, and that makes a lot of sense: Why would investors want to plow money into a company that has a very, very real chance of failing, and that has tons of state and federal government bodies showering it with hate?
DV, STRA: Strugglin’
At least ESI isn’t alone in its epic struggle-fest. DeVry is facing the wrath of the Federal Trade Commission, which filed a complaint in January alleging deceptive advertising practices. DV stock is down 33.8% in 2016, and over 50% in the last year.
Remember, Corinthian was brought down by claims that it had lied about the employment and earnings of its graduates.
For the record, DV CEO Daniel Hamburger has denied the allegations, asserting its claims about DeVry graduates’ success are adequately well done.
STRA stock, while it doesn’t have quite the same legal woes as DV and ESI weighing it down, has still plunged 20% in 2016. Revenue per student is expected to fall by 100 basis points in 2016, with revenue declining 0.4% and earnings per share falling 7% to $3.47.
The regulatory scrutiny peers like DV, ESI, and Corinthian have faced raise serious concerns that STRA could be the next for-profit education company to face pressure from the government, and the fact that it has a 1.4-star ranking on ConsumerAffairs.com (out of 5 stars) doesn’t bode well either.
Much like the coal industry, for-profit education just isn’t a sector with any long-term (or short-term) tailwinds. Be very careful betting on this industry to recover.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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