For-Profit Education Sector: Recession Proof

by: Graycell Advisors

In the stock market, there are companies that are suited towards performing better during times of economic stress. In an earlier article ‘Recession-Proof Growth Stocks,’ we had profiled some sectors and stocks. Continuing a similar theme, which has benefited our Graycell portfolios, we wish to shed light on another recession-resistant industry: the for-profit education sector.

Simply stated, people tend to upgrade and refresh their skills when business cycle declines. The additional education effort prepares the workforce to seek better and more competitive opportunities when the business cycle turns. This truism has reflected itself in the stock market over the years with regularity.

There has already been a trend in place towards greater opportunities in higher skilled-based employment compared to unskilled work, which requires education and training. As the work profile of the American economy continues to change, with a lesser emphasis on manufacturing based jobs, workers have to acquire new skills based on the transforming economy.

As the recession becomes more severe and unemployment increases, there is greater motivation for the broader workforce to join institutions and universities to augment their skills. This benefits educational companies. These companies will also gain from the impetus provided by significant federal spending on pro-education initiatives and preservation of federal grants as part of the new Obama administration’s economic stimulus package. Moreover, increased Federal emphasis on unlocking various securitization markets including the student loan market will only further assist students and educational companies, and alleviate credit concerns.

Companies that provide more accessible, flexible and relevant educational programs are witnessing strong improvement in their results. Education stocks like Apollo Group (NASDAQ:APOL), Cornithian (NASDAQ:COCO), Grand Canyon Education (NASDAQ:LOPE), and ITT Educational Services (NYSE:ESI), amongst many others, have materially outperformed the broader market over the last year.

Apollo Group recently released its quarterly earnings, and the results demonstrated significant enrollment growth in the company’s degree programs, as well as a greater rate of continuing education from existing enrollment. Students, instead of leaving upon completion of the initial program, are persisting and moving into other educational offerings. The company continues to lead the industry group in size.

Corinthian Colleges provides post-secondary diploma programs to over 75,000 students through its approximately 90 colleges. As the credit markets seized up last year, and options to secure student loans dwindled, the company came under significant scrutiny because of its reliance on such loans for about 10% of its business. Easing credit market conditions will assist the company to dispel credit-related fears. The company is also benefiting from a slowing economy, with enrollment climbing at a high single-digit percentage rate.

Grand Canyon is a recent public offering, and one of the very few offerings that was able to come public in the second-half of 2008, as the new equity market was paralyzed. The company has been growing its revenues at over 50%, and earnings are growing much higher. Both its programs, the online and its offline campus in Arizona, are benefiting from the growing demand for educational development, particularly in a stressful economy.

ITT Educational Services, provides technical skill programs to students through its over 100 technical schools across the country. The company’s focus on technical schools has differentiated it from most other for-profit education peers. ITT has consistently grown its earnings, and its strong focus on costs has resulted in earnings margin that are ahead of most peers, and towards the high-end of the industry.

All these stocks have outperformed the market by a significant margin during 2008. As we had mentioned in our earlier published work, growth investors can still find industries which deliver durable revenue and earnings growth during economically challenging times. Ferreting out ideas in such recession-insulated pockets in a timely manner can deliver substantial returns. Growth companies can still be discovered even in a recession.

Disclosure: The writer does not own a position in any of the above mentioned stocks at this time, but the firm has recommended positions in APOL and other educational stocks.