The for-profit education sector in general is one that has been almost universally panned over the past few years by a number of pundits and analysts alike. Take Apollo Group (NASDAQ:APOL) for example which has seen its share price crater from a peak of $56 in early 2012 to close to $19 at the end of the year. Obviously not all for profit education companies are created equally but there is a general stigma that has been applied to the sector in general. Documented abuses exist of federal student loan default rates being significantly higher at for profit education universities (such as the online universities covered in this article) compared to the neo-traditional brick and mortar colleges.
Reading the risk factor of the 10K for any one of these companies is like reading that of a multinational bank engaged in highly specialized derivative trading. The point being that a company providing basically a college degree for a fee should not have 30 pages of risks to highlight in their annual report.
The company this article will focus on specifically is one that most analysts in general have generally kept a favorable opinion of even as they have soured on the for profit education sector in general.
American Public Education (NASDAQ:APEI) is an online for-profit education company that was founded to cater exclusively to those enrolled in the military. Overtime they realized they probably needed to diversify to continue to grow and so they branched out and today military enrollment (or at least enrollment from those receiving military tuition assistance) makes up about 50% of the total course registration (which translates to about 50% of revenues).
Examining The Talking Points and Poking Holes in Them
1) The company likes to point out very prominently on their website that they are a cheaper alternative to traditional colleges. From their homepage they say:
Our combined tuition, fees, and books are roughly 15% less for undergraduate, and 33% less for graduate students than the average in-state cost at a public university
More importantly they have modeled their fee structure basically so that an undergraduate course is fully covered by Department of Defense (DOD) tuition reimbursement. This point in and of itself, while probably good for business, sends up a red flag as generally the market should dictate pricing and great schools charge more because they offer a better education. Quite frankly being only 15% cheaper than an in-state university (and the actual life experience that comes with physically attending college) is not all that impressive. The only thing that matters about their price is they are not charging anymore than the DoD will reimburse and this is a huge risk if that reimbursement amount is ever reduced.
2) The company believes that they have a competitive advantage over other online education providers because they are not as at risk of the dreaded 90/10 rule. The 90/10 rule basically stipulates that no more than 90% of revenues at for-profit education companies (such as APEI and APOL) can come from Title IV education assistance otherwise known as federal student loans. Currently DoD tuition assistance, while still in actuality is coming from the federal government just through a difference mechanism, is exempt from this rule. If that rule were to ever change then American Public Education would be perilously close to being in trouble as 87% of their revenue currently comes from either DoD/GI Bill assistance or Title IV loans (Title IV is currently 35% itself). Along these same lines the company points out in their risk factors that other for-profit education providers needing to diversify their revenue streams because of the 90/10 rule are also trying to take advantage of the DoD tuition assistance loophole and have aggressively moved towards to the military student.
3) The company continually touts its "exclusive" relationship with Walmart (NYSE:WMT) announced a few years ago to much fanfare. At the time it was announced that Walmart would market the company as the exclusive provider of education products to their 1.4M employees in exchange for the company offering a 15% scholarship to each employee who participates. It was also announced at the time that Walmart would provide up to $50M for tuition assistance and other costs over a 3 year period. Well reading the latest transcript from the last investor presentation it appears that investors need to better understand the relationship as described by the CEO:
Right now Walmart is not reimbursing the employees for their education they get with this. They have promised to do that at some point, to have a tuition reimbursement program.
Ok lets recap this great relationship with Walmart. A company that probably employs more low wage workers than any other in America is most likely not a hidden oasis of people that can either pay for school, get a student loan, or even desire to go to college. So while this is certainly a noble cause, until Walmart is actually willing to pay for their employees to attend college this is more of a publicity stunt than an actual real effort by Walmart to actually educate their employees or American Public Education to actually gain students
The Potential Black Swan for American Public Education
The sequestration that for all intents and purposes looks set to go into full effect on March 1st, 2013 will potentially mean that 800,000 civilian DoD employees will receive furloughs of some sort meaning less money in their pockets. Now this thesis is not born out by fact, but one that seemingly makes a good deal of sense. It is doubtful to me that many in the military who are actually serving in actual combat roles have the time to take off their Kevlar at night and sit down and take an online college course. My gut tells me the majority of those enrolled at American Public Education are sitting on US soil and are either in the reserves, retired, or are part of this civilian workforce employed by the DoD and will probably be reluctant to enroll in college knowing that they have less disposable income.
The other unknown factor is that as the military decides to make cuts you have to wonder if we are more likely to try to actually keep the weapons programs, soldiers, and health benefits such as the VA or if we are going to be more concerned with providing tuition reimbursement to an online college. Don't get me wrong I understand that having college paid for is a huge, if not the biggest, recruiting point for many teens who enter the military. But again I think those who envision having their college paid for are actually envisioning attending a real college. Like it or not a fully online for-profit education will never compare to that of most in-state public universities. If you ask me you get what you pay for and being the lowest cost provider of a college education is not something that I think is necessarily worth bragging about. Especially when you consider that the company is able to be such a low cost provider and still make a 20% operating profit before taxes. Again that just speaks to the quality of the education you are receiving.
The Bottom Line
So while the company is trading at about 17x CY earnings and a 15x forward PE I think there is significant risk to the growth expectations for American Public Education and it should be treated to the same depressed PE multiples that most other for-profit education companies are facing these. Short this stock or stay away.
There are too many unknowns and the potential for in-state universities to continue to diversify their offerings to include a hybrid of both on campus and on-line classes (or fully on-line for those who desire it is) is a huge potential risk. Ask yourself - would you rather have on your resume American Public Education or the University of Florida. I think the answer speaks for itself (unless you are an Ohio St or University of Georgia fan).