Private Education Providers: A Counter-Cyclical Investment Idea

Private education providers have often been viewed as counter-cyclical companies. Recent earnings reports reinforced this reputation.

Apollo Group (APOL), DeVry (DV), ITT Educational Services (ESI) and Strayer Education (STRA) all generated revenue and profit growth last quarter. The 4 companies also reported increases in student enrollment.

The weakening job market is pressuring more adults to enhance their educational backgrounds. Similarly, layoffs are causing some workers to learn new job skills. Kevin Modany, CEO of ITT Educational Services, opined that the current environment is placing a "premium on skilled labor". The decline in nonfarm payrolls is also likely causing some would-be job seekers to opt for the classroom instead.

Financing Not An Issue

Given the ongoing credit crunch, student loans would seem to be the elephant in the room. However, financing remains available for most students.

Standards have tightened, but the private education providers said most students are still able to get the loans necessary to pay for the credit hours.

Increases in federal loan limits and Pell grants have lessened the reliance on private loans. Modany observed that access to financial aid was unchanged in the third quarter. APOL added 2 new loan providers last quarter. And

It should also be noted that changes in bad debt expenses were mixed:

• APOL said bad debt, as a percentage of revenues, decreased 140 basis points on an adjusted basis.
• ITT incurred a 320 basis point increase in bad debt
• STRA reported a 20 basis point rise, which is essentially immaterial.

Results Good, Earnings Estimates Revised Higher

Apollo Group earned 75 cents per share in its fiscal fourth quarter, 8 cents above expectations. Revenues increased 16.5% to $831.4 million, as totaled degree enrollment rose 15.4%.

The majority of the 14 covering brokerage analysts raised their fiscal 2009 profit projections following the report. The new consensus earnings estimate of $3.45 per share is 14 cents above the average forecast of a week ago.

DeVry earned 48 cents during its fiscal first quarter, besting expectations by 4 cents. Revenues rose 21.3% to $303.7 million. Total DeVry University graduate student enrollment for the Sep 2008 session was up 12.2%. Enrollment at Ross University was 8.8% higher.

The majority of the 15 covering brokerage analysts raised their fiscal 2009 profit projections. The revisions led to a 3-cent increase in the consensus earnings estimate, which now stands at $2.20 per share.

ITT Educational Services earned $1.28 in the third quarter, surpassing the consensus earnings estimate by 13 cents. Total student enrollment rose 14.7%. New student enrollment jumped 19.4% to just under 22,000. Revenues reached $254.3 million, a 16.7% increase. Bad debt rose 320 basis points to 5% of revenues.

ITT raised its 2008 guidance and now expects full-year earnings to total between $4.90 and $5 per share, a 25-cent increase. All of the covering brokerage analysts raised their projections in response, boosting the consensus earnings estimate to $4.99 per share. These analysts also raised their 2009 projections as well.

Strayer Education earned 83 cents in the third quarter, 2 cents better than brokerage analysts had expected. Total enrollments rose 24% to 44,564, aided by a 29% increase in new students. Revenues rose 25% to $87 million. Student retention rose by 100 basis points.

STRA raised its 2008 earnings guidance to between $5.65 and $5.67 per share. The company also introduced 2009 earnings guidance of $6.90 to $7 per share. The forecasts led nearly all of the covering brokerage analysts to adjust their projections. The new consensus earnings estimates are $5.66 per share for 2008 (up 12 cents) and $6.97 per share for 2009 (up 16 cents).

STRA also raised its annual dividend to $2 per share, from $1.50.

Comments

[Dan Weiss:]

I agree 100% with the fact that the industry tends to be counter-cyclical and have been long Devry and Apollo Group. The valuation on Strayer is a bit high (although they clearly are a leader). I think as long as you stick with the four mentioned you will be fine and another one that would be interesting on weakness is APEI.

2008 Nov 05 06:32 PM

[Rescan:]

Regardless, those educational stocks are overbought and will correct soon. Best time to short them is when everyone else is buying at rediculous prices, especially APOL.

2008 Nov 10 11:50 AM

[Dan Weiss:]

Looking at the overall sector, ITT would be the most attractive based simply on valuation with APOL and and Devry just behind and then strictly on a valuation basis a stock like APEI looks rather expensive (although they are growing faster than others).

2008 Nov 13 12:23 PM