Even with Aggressive Valuation, For-Profit Education Stocks Seem Overvalued

“The horror!”

If you’re a fan of the film Apocalypse Now, you recognize that phrase as Marlon Brando’s closing line. As the Dow has fallen from the 14,000 level all the way down to the 8,000 mark, many investors have suddenly found themselves identifying with the famous Brando line. Yet, despite the all-out slaughter of capital that left very few stones unturned, one industry has managed to thrive. In fact, it has seemingly managed to reach bubble-like proportions in one of the worst market downturns of most of our lives. The industry: for-profit education.

Surely you’ve seen the ads. There are a host of companies in the sector including DeVry (DV), Strayer (STRA), and Apollo (APOL). All three companies plus others have seen their stock go upwards significantly during a time when the rest of the market has been enduring all-out carnage. Yet, with more traditional universities offering online options and state universities offering much lower costs to students, plus a degree that is viewed as much more valuable, is all the optimism about the for-profit education sector a bit excessive?

Taking a look at some of the players in this sector:

(1) DeVry

Arguably, DeVry is the most famous of the for-profit education bunch. We’ve all seen the ads for many years now. They also appear to be the least aggressively valued of the group.

For a lot of companies, I will run what I call a “quickie DCF” on them to get a ballpark idea about valuation. At first, I will normally set my spreadsheet up in an effort to disprove my initial hypothesis. For all of the stocks mentioned in this article, my null hypothesis is that they are overvalued, so I initially use very aggressive figures for my discounted cash flow analysis.

For DV, I go with a low cost of capital at 8%, assume free cash flows of $2 per share for Year 1 (Y1) and $2.10 for Year 2 (Y2) before assuming a constant growth rate of 5%. Using these aggressive valuation metrics, I come up with a value around $58 – 60 for DeVry; which also happens to be where it’s trading right now. You could view that as a good sign or you could say that DeVry appears to be “priced for perfection.”

If we use somewhat less aggressive numbers, the valuation drops considerably. If we go with a 10% cost of capital, assume free cash flows of $1.75 per share for Y1 with a constant 4% growth rate, our valuation suddenly falls all the way down to about $40.

If we assume their recent performance is somewhat of an aberration and use $1.50 for Y1 free cash flows, we come up with a valuation closer to $35. Even this latter valuation could arguably be perceived as “somewhat aggressive” given that it assumes that DeVry will continue to thrive for many years to come and that their most successful fiscal years are not outliers.

One might also want to take a look at recent insider transactions as it appears there is a great deal of selling going on. There's a $1.8 million sale at $50, an $8.3 cash-out at $55, and lots of $1 million+ sales earlier in 2008 at prices above $55. There was also a more recent $1 million sale at $60.

Based on all of this, it would appear to me that DeVry is overvalued and should be trading closer to the $30-40 range.

(2) Strayer

While I think there’s a case to be made for DeVry, I have a difficult time seeing the case for Strayer. Free cash flows for FY '07 were around $4.60 per share and earnings were about the same. Even if you take their most profitable recent quarter (ending Mar '08) and extrapolate yearly earnings based solely on that, you'd only come up with $7 per share - and that looks like an aberration.

In spite of this, I use extremely aggressive figures for my first valuation attempt. I go with an 8% cost of capital, and assume they bring in FCFs of $8 per share for the next three years before achieving a constant 5% growth rate. Even based on these extremely aggressive figures, I come up with a valuation closer to $200. Given STRA’s recent trading range of $210-220, it seems that the market is extremely bullish about its prospects.

Using a saner 10% cost of capital and assuming $6 in FCFs for Y1 before achieving a constant 5% growth rate, I come up with a valuation around $125-130 for STRA. That’s quite a drop-off and it’s still quite easily arguable that this is an extremely aggressive valuation. If I drop Y1 FCFs down to $5, the valuation drops to the $105-110 range. If I lower my constant growth rate down to 4% on top of that, I come up with a valuation in the $95-100 range.

By the way, just in case you were wondering, insiders seem to be selling this one, as well. Mr. Robert Silberman sold $30 mil worth of his stock at $228, while director Todd Milaon dumped off about $1.7 mil at $220.

Based on all of this, it would appear to me that Strayer is significantly overvalued and probably should be trading closer to the $100 price point.

(3) Apollo

I saved the best for last. If DeVry and Strayer are “overvalued”, Apollo may have even bigger concerns. You might know Apollo better by another name – it operates the University of Phoenix. Citron Research recently released a damning two-part report on APOL (Part 1, Part 2) that may very well emphasize some larger problems are afoot. The report highlights a recent lawsuit brought by former students that is critical of the University of Phoenix for returning federal loan money to the lenders. The problem, as Citron puts it:

So here’s the question: why would the [University of Phoenix] surrender cash in hand that is rightfully theirs, in exchange for a hard-to-collect receivable, plus collection costs and risks? Why would UOP intervene in a lender/borrower relationship that they actually helped facilitate?

It’s a good question and it raises questions about Apollo’s financial reporting. What makes it all the more suspicious is the high amount of insider selling. Insider selling at DeVry and Strayer look minor compared to the massive swath of insider sells at Apollo; many of the recent ones are valued in the tens of millions of dollars.

Taking a look at a quick DCF analysis for Apollo, things don’t look too bad on my initial aggressive valuation. I use an 8% cost of capital and I assume FCFs for Y1 are $5 per share before achieving a 5% constant growth rate. Ignoring the Citron Report and closer analysis of APOL’s financial statements, this is not that off-base as APOL achieved $5 in FCFs for their most recent fiscal year. While it does look like somewhat of an aberration, one could argue that it is not. Using this “aggressive valuation”, I come up with a price in the $130 range. Not bad considering APOL has recently been selling between $80-90.

Using a more conservative 10% cost of capital and Year 1 FCFs of $4 (with our 5% constant growth rate), we end up with a valuation in the $80-85 range; much closer to the current price. If we start that DCF analysis with Y1 FCFs of $2.50 and use a 4% constant growth rate, we come up with a valuation closer to $45. I’d argue that would be the most realistic of the bunch if it were not for the other problems at APOL.

With concerns over financial reporting, I’d argue that APOL is worth closer to $20 right now than $80 and despite not seeming to be as aggressively valued as Strayer, it would appear to be the scarier of the two right now.

Other Stocks

While I did not take quite as in-depth of a look at these companies, Capella Education Company (CPLA) and Grand Canyon Education (LOPE) are two more companies in the for-profit education sector that might be significantly overvalued. The latter company recently held an IPO and concerns have been raised over the fact that 75% of the proceeds from that IPO going to insiders.

Concluding Thoughts

Is there a for-profit education bubble? That’s left for each individual investor to decide for his or herself. All the same, it’s amazing to think that a bubble could have formed in one of the worst market downturns in history. The valuations for the companies in the for-profit sector appear to be extremely aggressive. If this is indeed a bubble, investors going long on these stocks right now could find themselves having more Brandoesque moments when all is said and done.

“The horror,” indeed.

Disclosures: No position on any stocks mentioned

Comments

[User 217100:]

Of all the pathetic pieces of "analysis" i have read on financial websites, this may take the cake. It is as if you have no formal business training whatsoever. Did you just look up how to build a DCF model in a text book and start publishing articles about stocks. It seems you have no idea what drives value for stocks and how to run a true DCF model. This artilce is very misleading and highly irresponsible. While I think some of the contributors to Seeking Alpha do some good work, this is embarrassing.
How can you run a DCF model that starts with year 1 FCF at 50% of the most recent fiscal year and call that realistic. Education stocks have highly recurring revenue streams and it is extremely unlikely if not impossible for FCF to drop 50% in one year. If one of these stocks has an earnings decline of 50% in a year there is no doubt that the stock will go down quite a bit, but it is not because the stock was expensive according to your "quickie DCF". In addition, it is not realistic to assume that FCF will grow 4% or 5% in year 2. These are stocks that are currently growing earnings by 20%+. While 5% is probably as good of a guess as any as to the long-term growth rate, it is by no means a realistic estimate for growth in the next 2-3 years for any of these stocks.
I am not trying to argure whether these stocks are over or undervalued, but simply to point out that your analysis does not make sense and it is very misleading to publish something where you say you think APOL is worth $20 and it is based on no realistic financial analysis.
I would hope you do a little more work on the stocks you publish articles on in the future. While this is a free website, i would think you would feel obligated to publish accurate and reasonable articles.
And just as an aside, stocks do not go up because they are cheap and they don't go down because they are expensive. The market is pretty efficient and you are not going to have a lot of success trying to be smarter than the market. For the most part, stocks move based on earnings generation relative to expectations. A DCF may help tell you what type of expectations are assumed in a stock, but they do not drive the stock price.
Good luck.

Jan 28 09:30 AM

[H.J. Huneycutt:]

User,

Your assertion that I started my DCFs based on 50% of current FCFs is blatantly false. It makes me question why you remain anonymous and whether or not you have an agenda here. If you read the article, you will find that in many cases, I started the DCFs with FCFs that were much, much higher than what these companies have historically produced.

Strayer's most recent FY FCFs were around $4.60 per share, yet I used an $8 per share starting point to show the absurd level of expectation built into the current price. Can you explain to me how $8 is 50% of $4.60? Pull out a calculator and you'll find that $8 is a 74% increase from $4.60 - highly unrealistic and yet, a DCF analysis based on that and a low cost of capital still comes up with a lower valuation than the one the market is giving.

Also, you haven't seen my DCF model, so it's strange that you would have the ability to dissect and analyze it. If you disagree with my analysis, that's fine, but your behavior suggests to me that either you have a vested interest here or that you are unable to conduct yourself in a professional manner. You are being dishonest in your criticisms as anyone who reads through the article can see I never started any of my models based on a 50% drop in free cash flows.

I explained all the numbers for my DCF models and why I used them - if you don't believe those to be accurate, then you're free to disagree, but you're doing a disservice to readers by pretending you're an expert on valuation. Stocks are ownership stakes in a company and there is a real underlying value. Stocks that are "overvalued" based on fuzzy valuation metrics are more likely to crash. If you don't believe valuation matters, that's fine, too - there are people who'd rather follow "stock psychology", but I'd argue those are the types of people who get killed during bubbles.


You really only make one valid point in your rant. I did not explain why I would value APOL at $20 with much detail. It is based on the fact that I view my last DCF analysis of them to be overly optimistic, plus concerns about honesty of management and validity of their financial reporting should lead shareholders to discount the stock further. So if my DCF comes up with a valuation near $40, then I need to discount further beyond that and I think a 50% haircut is about right given the Citron Report on APOL.

Jan 28 10:09 AM

[User 217100:]

here is what you wrote:
"...If we start that DCF analysis with Y1 FCFs of $2.50 and use a 4% constant growth rate, we come up with a valuation closer to $45. I’d argue that would be the most realistic of the bunch if it were not for the other problems at APOL."

you clearly state that you think a yr 1 FCF of $2.50 is the "most realistic". This is roughly a 50% discount to where APOL should realistically be in the current fiscal year. This could not be further from the most realistic. APOL should do close to $5 in FCF in the next year and FCF will probably grow at least 20% in year 2. I never said your STRA estimate was 50% of the current fiscal year. Your $8 assumption is perhaps 5-8% too high, but it is not that far off for STRA based on current consensus estimates.

Of course i have not seen your DCF models, so i am not trying to dissect them. I am only basing my comments on the details you provided which for the most part seem kind of silly. i agree that an 8% cost of capital is way too low. but some of your yr 1 FCF assumptions do not make sense and your growth assumptions really do not make sense either. Your assumptions just all seem to be very arbitrary. A traditional DCF model is highly sensitive and easily manipulated based on the assumptions. For that reason I think it is pretty unrealistic to assume a 5% growth rate in yr 1 or 2 when the real growth rates will likely be 3 or 4x that level.

I do consider myself an expert on valuation, but that is not the issue here. I am long APOL, but i'm not trying to argue whether the stock is over or undervalued. i'm just pointing out that your claim that a $2.50 yr one FCF and a 4% growth rate are extremely unrealistic and misleading.
And i did not say valuation does not matter. I said a stock does not go up because it is cheap or go down because it is expensive. A stock that is expensive may very well go down, but the stock will not go down simply because it was expensive. It would likely go down because earnings expectations got too high and the company could not grow at the rate assumed in the stock price. This is a subtle but very important difference in what drives a stock.
Again, i'm not trying to argue whether APOL is going up or down. I've done my analysis and i'm very comfortable with it. The research done by citron is interesting, but my sense is they are mostly involved in a smear campaign in support of their short position on the stock. If you want someone with an agenda it is them. I'm simply stating that your assumptions used to justify a $20 valuation for APOL are very unrealisic and misleading.
I'm happy to discuss my opinions on the education sector with you offline, but for the purposes of this website, i will remain ananymous.
thanks.




On Jan 28 10:09 AM H.J. Huneycutt wrote:

> User,
>
> Your assertion that I started my DCFs based on 50% of current FCFs
> is blatantly false. It makes me question why you remain anonymous
> and whether or not you have an agenda here. If you read the article,
> you will find that in many cases, I started the DCFs with FCFs that
> were much, much higher than what these companies have historically
> produced.
>
> Strayer's most recent FY FCFs were around $4.60 per share, yet I
> used an $8 per share starting point to show the absurd level of expectation
> built into the current price. Can you explain to me how $8 is 50%
> of $4.60? Pull out a calculator and you'll find that $8 is a 74%
> increase from $4.60 - highly unrealistic and yet, a DCF analysis
> based on that and a low cost of capital still comes up with a lower
> valuation than the one the market is giving.
>
> Also, you haven't seen my DCF model, so it's strange that you would
> have the ability to dissect and analyze it. If you disagree with
> my analysis, that's fine, but your behavior suggests to me that either
> you have a vested interest here or that you are unable to conduct
> yourself in a professional manner. You are being dishonest in your
> criticisms as anyone who reads through the article can see I never
> started any of my models based on a 50% drop in free cash flows.
>
>
> I explained all the numbers for my DCF models and why I used them
> - if you don't believe those to be accurate, then you're free to
> disagree, but you're doing a disservice to readers by pretending
> you're an expert on valuation. Stocks are ownership stakes in a company
> and there is a real underlying value. Stocks that are "overvalued"
> based on fuzzy valuation metrics are more likely to crash. If you
> don't believe valuation matters, that's fine, too - there are people
> who'd rather follow "stock psychology", but I'd argue those are the
> types of people who get killed during bubbles.
>
>
> You really only make one valid point in your rant. I did not explain
> why I would value APOL at $20 with much detail. It is based on the
> fact that I view my last DCF analysis of them to be overly optimistic,
> plus concerns about honesty of management and validity of their financial
> reporting should lead shareholders to discount the stock further.
> So if my DCF comes up with a valuation near $40, then I need to discount
> further beyond that and I think a 50% haircut is about right given
> the Citron Report on APOL.
>

Jan 28 11:19 AM

[H.J. Huneycutt:]

User,

To be honest - I think you're displaying an emotional bias based on your own vested interest in APOL.

My claim that the $2.50 figure is the most realistic figure for APOL is based on my belief that the latest fiscal year is an abberation and that APOL's earnings in particular are suspect. For the three prior fiscal years, their FCFs were closer to $3 per share than $5. However, I clearly stated that this was merely my opinion on the matter. If you disagree, that's fine, but don't see any justified reason for your hostility. It's not as if I did not present readers alternate scenarios and my second DCF for APOL actually came up near the actual price.

I also misspoke when I said APOL achieved $5 in FCFs for the most recent fiscal year; I meant that they achieved $5 for their most recent four quarters; a minor difference but a notable one --- they only achieved $3.88 in FCFs for their most recent fiscal year, but they claimed very huge FCFs in their most recent quarter which helps bump the figure upwards for the past 4 quarters. The most recent quarter appears to be an abberation. However, since my null hypothesis is that APOL is "overvalued", I base my initial calculation on those aggressive figures.

I don't see a 20% growth rate as realistic or advisable for a DCF analysis; particularly when earnings suddenly jump. $4 per share in FCFs seems fairly aggressive to me when it comes to APOL. $4 with a 20% growth rate for a few years seems even more aggressive. $4 with a 5% constant growth rate is aggressive enough. It's really difficult to see even two to three years in the future so it's silly to assume high levels of growth beyond a year or so. The fact that I use a 5% constant growth rate in most of these scenarios is really fairly aggressive by most standards; 3% would be closer to the norm.

Jan 28 11:55 AM

[H.J. Huneycutt:]

Also, let me be clear as to why I assign a $20 valuation to APOL --- based solely on a DCF analysis, I'd probably be willing to pay $40-45 for them. However, to me, the Citron report is extremely damning. You can say Citron is only supporting their own shorts, but they have a pretty good track record at sniffing these things out. Moreover, everything they say makes a lot of sense in regards to APOL.

Based on that, I think investors need to aware that there are greater risks than normal with APOL. If Citron is right, it could be an extremely huge blow to Apollo and the stock could tumble quite a ways. If I'm thinking about buying this stock, should that be on the back of my mind? You betcha!

Hence, I would discount the stock heavily based on that; just as people are discounting bank stocks based on fears that their assets might not be all they are cracked up to be. Notice that I did not do the same thing with DV and STRA; I think both are overvalued right now, but I'm not sure the concerns go deeper than that.

Jan 28 12:06 PM

[Misha:]

With some amusement, I read through your discussion, at times uncomfortably feeling like a peeping Tom witnessing what appears to be a private conversation.

Though I have nothing to add to your specific discussion, I want to thank you for alerting me to this segment of the market. I will short Apollo (probably by selling puts) for the following reason:

1. Evaluations are ridicules in this market. Quoting from Barron’s:

“The excessively easy-seeming trade in pricey stocks applies to the private education sector, one of the very few strong groups of the past year and week, with members approaching or carving out new highs lately. The relevant names include ITT Educational Services (ESI), Apollo Group (APOL), Devry (DV) and Corinthian Colleges (COCO). They offer online and in-person courses, mostly vocational, and the Street loves them at the moment.

The facile bullish case goes like this: Unemployment is swelling rapidly. Millions of people may need job retraining. The Obama administration's proposed economic package, while mostly focused on tax breaks and unemployment benefits and infrastructure projects, makes mention of some money for job retraining aid. The companies are mostly debt-free. ITT Educational Services reported nice profits last week, and executives boasted of brisk new-student enrollment. The stock charts, for those inclined to look, are pretty, showing firm uptrends and solid investor demand -- as momentum stocks do until the moment the momentum flags.

Given this happy cheat sheet, the Street is lopsidedly supportive of the stocks, quick to defend them against a stubborn cadre of critics and valuation-sensitive investors. At a time when the majority of bearish stock ideas settle on the already-battered groups -- and can seem like the coach running up the score against a weak team -- maybe a dose of skepticism is warranted for this over-liked sector.

We can start with those valuations near or above 20 times projected 2009 earnings, a level that today would be the envy of even Google (GOOG) executives. The education stocks' P/E multiples relative to the broad market are likewise straining toward the upper end of their historical ranges.

The for-profit education business itself isn't the most transparent, depending in large part on government-backed student loans, an area that has drawn much scorn as rife with manipulation. Student attrition is rather high. And even though the Obama team is looking to help workers learn new skills, there's a good chance there will be a shift from the Bush administration's high level of friendliness toward for-profit educators.

The stocks are likely at risk, too, of any subtle alteration in investor mindset about the employment market or other consumer dynamics. There's some evidence that fund managers are "hiding" in this group, which is part of the consumer discretionary sector. Investors frightful of any retailer or boat maker or media company are more than willing to pay up for the education stocks to get their consumer-discretionary exposure.”

2. The quality of education in for-profits is poor. Any student who can get into almost any state school with names like University of ABC (insert the name of your state), ABC State University should avoid these for-profits.

Jan 28 01:23 PM

[H.J. Huneycutt:]

Misha, I totally agree with you. In particular ...


"The quality of education in for-profits is poor. Any student who can get into almost any state school with names like University of ABC (insert the name of your state), ABC State University should avoid these for-profits."


You're right on the nose with that one. That's also part of my reasoning here. I think these stocks are aggressively valued even ignoring that, but a prolonged recessionary environment probably means that people are going to be more cost-conscious about their education. Employers look at a degree from [insert state] University as much more valuable than a degree from University of Phoenix Online. That's just the way it is, so I don't see these insane growth prospects that many others forecast panning out. Also, a lot of the people attending these for-profit institutions are people who already have jobs and don't have the time to attend a traditional university. If anything unemployment does not bode well for this group.

I'm also in agreement about the political environment shifting on this. The Bush Administration was probably a bit overly friendly when it came to these companies; some of which are arguably quite predatory towards their students. I'm not normally one to make investment analysis based on what the government does, but this is one sector where government attitude might be critical and I think there's going to be somewhat of a reversal of attitude on this.


As a random aside, I do find it ironic that there is a University of Phoenix Online ad to the left of this article right now.

Jan 28 01:50 PM

[PROXIMO:]

You indicate that your sense is that Citron is most likely involved in a smear campaign to support their short position. Regardless of whether that is the basis of Citron's analysis, it may be in your best interest to take a peek at their website. Unless their website is based on fraud and lies, and I seriously doubt that it is, you may want to give careful consideration to their short calls. They have been EXTREMELY accurate in their calls----I mean lights out accurate. No way I'd go long against any of their shorts. NEVER.


On Jan 28 11:19 AM User 217100 wrote:

> here is what you wrote:
> "...If we start that DCF analysis with Y1 FCFs of $2.50 and use a
> 4% constant growth rate, we come up with a valuation closer to $45.
> I’d argue that would be the most realistic of the bunch if it were
> not for the other problems at APOL."
>
> you clearly state that you think a yr 1 FCF of $2.50 is the "most
> realistic". This is roughly a 50% discount to where APOL should
> realistically be in the current fiscal year. This could not be further
> from the most realistic. APOL should do close to $5 in FCF in the
> next year and FCF will probably grow at least 20% in year 2. I never
> said your STRA estimate was 50% of the current fiscal year. Your
> $8 assumption is perhaps 5-8% too high, but it is not that far off
> for STRA based on current consensus estimates.
>
> Of course i have not seen your DCF models, so i am not trying to
> dissect them. I am only basing my comments on the details you provided
> which for the most part seem kind of silly. i agree that an 8% cost
> of capital is way too low. but some of your yr 1 FCF assumptions
> do not make sense and your growth assumptions really do not make
> sense either. Your assumptions just all seem to be very arbitrary.
> A traditional DCF model is highly sensitive and easily manipulated
> based on the assumptions. For that reason I think it is pretty unrealistic
> to assume a 5% growth rate in yr 1 or 2 when the real growth rates
> will likely be 3 or 4x that level.
>
> I do consider myself an expert on valuation, but that is not the
> issue here. I am long APOL, but i'm not trying to argue whether
> the stock is over or undervalued. i'm just pointing out that your
> claim that a $2.50 yr one FCF and a 4% growth rate are extremely
> unrealistic and misleading.
> And i did not say valuation does not matter. I said a stock does
> not go up because it is cheap or go down because it is expensive.
> A stock that is expensive may very well go down, but the stock will
> not go down simply because it was expensive. It would likely go
> down because earnings expectations got too high and the company could
> not grow at the rate assumed in the stock price. This is a subtle
> but very important difference in what drives a stock.
> Again, i'm not trying to argue whether APOL is going up or down.
> I've done my analysis and i'm very comfortable with it. The research
> done by citron is interesting, but my sense is they are mostly involved
> in a smear campaign in support of their short position on the stock.
> If you want someone with an agenda it is them. I'm simply stating
> that your assumptions used to justify a $20 valuation for APOL are
> very unrealisic and misleading.
> I'm happy to discuss my opinions on the education sector with you
> offline, but for the purposes of this website, i will remain ananymous.
>
> thanks.
>
>
>
>
> On Jan 28 10:09 AM H.J. Huneycutt wrote:

Jan 28 04:00 PM

[fydo:]

As a graduate of Univ. of Minnesota and Univ. of Arizona, I place virtually no value on what I call "storefront" universities. And I don't think many employers do either. There is an ample supply of graduates from State (Big Ten type) or prestigious private universities, and the respect for a storefront university has to be in a really bringing-up-the-rear posture.

Jan 28 04:47 PM

[User 217100:]

Listen, i did not intend to get into a debate about whether APOL is a short or a long. I think it is a long at this level, and you guys want to short the stock. Go ahead and short the stock, that is great, i encourage it as a matter of fact. It will only add to the gain the stock has when they report earnings in March.

i don't disagree that these education stocks will be great shorts some day, most growth stocks eventually are. But as with any short trade, the most important factor is timing. You can be spot on with regards to the fundamental short call, but get your face handed to you if you are too early.

In my humble opinion you guys are way too early to the party. everyone wants to look at the valuations of the group (or "evaluations" as the one poster calls them) and say the stocks are going to fall just because they have outperformed. I know this may be a crazy thought, but has anyone bothered to look at the fundamentals. ESI just posted 29% growth in new student enrollment. APOL just posted about 20% growth in enrollment. The stocks are going up because the fundamentals are extremely strong and they should stay that way for at least the near-term.
Given the strong fundamentals I would even argue these stocks are still cheap. The problem with looking at the multiples of the group is that the assumption is that the E of the P/E ratio is correct. ESI just beat 4Q estimates and raised FY09 guidance about 12% above consensus and estiamtes are still way too low. Same thing with APOL. I expect them to handily beat estimates again. based on what i think the real earnings are, i don't think many of these stocks are that expensive. I guess we will see.

Ctiron may have a very good record, but my guess is they are not right all of the time. If so they would be running a much bigger hedge fund. They are probably right in their call (although for the wrong reasons). The problem is that the short call will probably be when the stock gets to $125 and then falls back to $65 or something.
Best of luck to you guys, but i would be real careful shorting this stock ahead of 2Q results. The education stocks will not roll over until the fundamentals do and expectations get too far ahead, but that has not happened yet.

Jan 28 05:58 PM

[Ron Sommer:]

As an administrator at a major public university, I can say that we do not accept degrees from any of the online distance learning schools in this discussion. The University will not accept credits for transfer and it does not accept a degree from such an institution as a qualification for any position requiring a college degree. It may be that my employer is behind the times in matters like this but it seems from other comments, that employers in the private sector are not anxious to accept them either.

Something else to consider. Enrollments trends are only part of the story when looking at an educational instition. We also study retention and completion levels which we consider as important, if not more important, than enrollment. Our focus is getting our students through our programs successfully. If they do not stay in school or do not complete their program, we have failed in our mission.

The for-profit schools also lose out if they do not retain and complete students. The high turnover of students, the cost of acquiring students all effect their bottom line.

Jan 29 03:46 PM

[User 217100:]

I think an important thing to remember is that a big focus of the for-profits is vocational education progams. Some do offer traditional associates, bachelors and masters degrees, but by and large we are talking about vocational. It is IT, auto, culinary, nursing or other similar programs. For the most part a gradutate of UOPX or ITT is not competing against someone from a big ten or private university for a job. The typical student at the for profits is going to be pretty low income and low skilled. But they can go to ITT or Devry and get a degree that allows them to make 50, 75, or sometimes even 100% more than they were earning without the degree. So of course a degree from STRA is not going to be the same as a degree from UofMinn or Arizona.
So it is important not to get too caught up in comparing traditional schools to the for profits. For the most part they are very different. The quality of education from the for profits has been debated pretty much since these companies came public, and it will likely continue. But the job placement rates and salary data seem to support the quality of education.
There is no doubt that enrollments are not the only thing to watch. I just did not feel like getting into too much detail here. Retention, persistance, cost of student acq are all critical factors. But most of those are trending pretty well right now.

Jan 29 05:58 PM

[Ron Sommer:]

I wanted to comment on the valuation issue around APOL. I use a different methodology than used by others who expressed an opinion here. However, in my opinion, APOL has an estimated value in the range of $40.36 to $55.77 with an average estimated value of $46.73. For the record, I use multi-factor analysis. Additionally, I would use $4.89 as an estimated FCF.

Jan 29 07:19 PM

[User 217100:]

sommer, i think you may need to add a couple more factors to your analysis. i have no idea what methods you are using, but on the surface it sure seems hard to use a FCF estimate of 4.89 and get a value in the mid-40s. i guess you could be using a 15% rate of return or assuming negative growth or something. otherwise that does not seem to make sense. the only way this stock is worth $40 is if citron is correct and there is massive fraud and misrepresentation of data. could be true, but don't think any valuation model is going to tell you that.

Jan 30 09:31 AM

[Xanadu:]

The value of STRA stock will drop like a rock when investors discover the institution is not accredited by the Southern Association of Colleges and Schools (SACS), which evaluates all colleges that have headquarters in Virginia. According to the Virginia Corporation Commission, the headquarters of Strayer University, Inc., is in Arlington, VA. The headquarters of the school's online division is in Newington, VA. Strayer gets around this by claiming that its headquarters is in WashDC, thus not subject to SACS oversight.

Apr 20 05:21 PM

[Xanadu:]

The value of STRA stock will drop like a rock when investors discover the institution is not accredited by the Southern Association of Colleges and Schools (SACS), which evaluates all colleges that have headquarters in Virginia. According to the Virginia Corporation Commission, the headquarters of Strayer University, Inc., is in Arlington, VA. The headquarters of the school's online division is in Newington, VA. Strayer gets around this by claiming that its headquarters is in WashDC, thus not subject to SACS oversight.

Apr 20 05:22 PM

[User 515587:]

Ron,

Its funny that you say your university does not want to honor a course completed by a student at a for-profit accredited university, and you don't seem to have any kind of guilty feeling doing that.

Well actually, any university has a right to decline a student from transferring a course, and universities are known to do that because education is in such high demand, you guys can actually get away with anything. Even something unethical as asking a student to repeat all courses even though you know they have completed and passed it elsewhere.

That very well explains how the universities in this country are getting more and more expensive and costs going up faster than inflation. Do you take any responsibility for that? Perhaps forcing kids to re-take course might be one of the reasons why costs are so high? Think about it.

Appolo group, Strayer and Devry together collected 6B in fees in a year from students. You are suggesting, the students that went to these schools and passed their courses or got their diplomas did this all for nothing? Just because they did it from a for-profit competitor? Why do you think education should be only provided by a non-profit. Especially when non-profits have shown over and over again that they do not wish to keep a lid on costs? And btw, your lower tuition is as a result of govt grants. So you are actually sitting on top of lot of tax payer monies.

Regarding APOL, SEC inquiry is routine, and at best they will be forced to restarte some financial statements.

The revenue in 2008 was almost 4B up from 2.25B in 2005. Anybody who thinks their high growth phase has phased out and is going to now grow at 5% in perpetuity is delusional.

quicktake.morningstar....
shows their cash flow for the latest 12 months was over 800MM, compared to 630MM and 475MM for previous years. This shows their FCF per share is around 5.30, if not more and rising at fast rate.

Author of this article, try running a DCF on that with a higher cost of capital due to some recent negativity, then see what you come up with. And please, be true to yourself and atleast do a 15% growth for next 3-5 years, then gradually bring it down to 5% say by dropping to 13 in 6th, 11 in 7 and so on. I bet the valution would be over 80 even with a higher cost of capital of say 12%.


On Jan 29 03:46 PM Ron Sommer wrote:

> As an administrator at a major public university, I can say that
> we do not accept degrees from any of the online distance learning
> schools in this discussion. The University will not accept credits
> for transfer and it does not accept a degree from such an institution
> as a qualification for any position requiring a college degree. It
> may be that my employer is behind the times in matters like this
> but it seems from other comments, that employers in the private sector
> are not anxious to accept them either.
>
> Something else to consider. Enrollments trends are only part of the
> story when looking at an educational instition. We also study retention
> and completion levels which we consider as important, if not more
> important, than enrollment. Our focus is getting our students through
> our programs successfully. If they do not stay in school or do not
> complete their program, we have failed in our mission.
>
> The for-profit schools also lose out if they do not retain and complete
> students. The high turnover of students, the cost of acquiring students
> all effect their bottom line.

Nov 20 03:41 PM