There are few industries that are more despised than for-profit education. Can value-minded investors exploit this hate to buy some of these stocks on the cheap?
Yes. Many stocks in this industry trade at very cheap valuations:
EPS Growth Next 5 Years
ITT Educational Services
Universal Technical Institute
The Washington Post
Grand Canyon Education
Corinthian Colleges is trading at the lowest price multiples in this group. Is it a bargain among bargains in the beaten for-profit education sector? Is there a compelling reason why it is trading at much lower multiples than other for-profit stocks like DeVry?
We can check to see if Corinthian Colleges should be cheaper than its peers by checking if it is substantially worse than them. Stocks should be evaluated according to how government programs view them.
Government-sponsored financial aid is the key to these businesses. Without government support, the industry would lose most of its students. We can sample how many of these companies fare by looking at how many campuses of different institutions became ineligible for Cal Grant funding.
More financial aid sources are becoming more stringent at the institutional level. Tougher rules for Cal Grant eligibility will disqualify 80% of for-profit colleges in California. At the federal level stricter minimum graduation rates could also disqualify many for-profit colleges.
Nearly all the campuses of for-profit, publicly traded companies which participated in the Cal Grant program become ineligible under tougher standards. Though most for-profit stocks have other campuses that did not participate in the Cal Grant program, it is clear that these are terrible default rates. Student loan defaults and graduation rates were averaged by parent company:
Average of 2008 Trial 3‐Year Cohort Default Rate (%)
Average of 2010‐11 Graduation Rate (%)
All things considered, Corinthian Colleges is trading at one half or less of the valuation multiples of DeVry, yet its graduation rate and default problems are not twice as bad. Of the firms listed here, Corinthian Colleges looks like a good speculative bet based on its cheap valuations.
Investors looking for higher quality investments might want to consider Universal Technical Institute which trades at a lower price-to-sales multiple than DeVry while maintaining higher graduation rates and lower student loan default rates.
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