Investing In Education - A Glass Half Full, Or Better?

Includes: APOL, BPI, NAUH
by: Craig Keolanui

The current stagnant economy and lingering high unemployment is forcing many workers and even recent college graduates to go back to school. With the cost of traditional four year universities so high, coupled with the lack of free time to spend in class, many non-traditional schools have sprung up in just about all areas of the country. These for-profit schools, like University of Phoenix, part of the Apollo Group (NASDAQ:APOL), are tailored to prosper in this economy with Internet courses, night classes, condensed curriculum and more specific skills being taught along with a savings in time and money that are hard to beat. Government regulatory concerns hit the industry but have abated for now yet falling revenues and enrollments have besieged the industry pushing most stock valuations in this sector significantly lower. Is this the time to get in or will further government interventions cripple the industry more?

It is hard to say the time is right with such an exodus of investors and their interest, but a big plus is that people and state governments are relatively broke. The spiraling cost of a college education coupled with the lack of state level funds for erecting more public institutions, could make private for-profit schools key players in educating our future workforce. That said, there are many profitable companies whose shares have dropped over half of their value within the past couple of years. Most of these companies are well capitalized and have plenty of cash with very little to no debt.

The first to take a look at is a bigger company that was founded back in 1973. The Apollo Group Inc., highlighted by its flagship programs of the University of Phoenix and others, is the nation's largest private accredited university. The Apollo Group spans the globe with programs in the U.K., Chile and Mexico. This is a big company with about 50,000 staff members and a market capitalization of around $1.94 billion. Apollo Group has an outstanding P/E ratio of 4.96 and EPS of 3.47 with virtually no debt and even over $1.1 billion dollars in cash assets alone. The current valuation at $17.24 per share is a low point that it hasn't even been close to since 2001. Apollo Group has produced pretty stable revenues and profits making it less risky than many of the others and coupled with that billion plus in cash it makes it a strong consideration.

One of the mid-sized players in this sector is Bridgepoint Education (NYSE:BPI). Bridgepoint has campuses in Iowa (Ashford U) and Colorado(Univ. of Rockies) along with online courses for around 85,000 students. On July 3rd of 2012, this stock was just under $22 a share and is currently trading at just over $10 a share. All this for a company with a P/E ratio of just over 4 (4.22) with cash, an EPS at about 2.4 and receivables and short term investments almost equal to it's market capitalization. Bridgepoint has experienced solid growth through the last few years and no real debt making it a solid candidate for more interest.

On the smaller side is lightly traded National American University (NASDAQ:NAUH). National American University (NAU), based out of South Dakota serves around 11,000 students in various disciplines including a specialized program in healthcare coding. Like others in this industry, NAU saw its stock go from $7.24 a share near the end of last March to just under $4 a share today. This drop occurred despite stable revenue and profit and even a dividend yield currently just over 4%. NAU has a market capitalization just under $100 million, a P/E ratio of 20.54 and a payout ratio under 80% (78.9%) making it a pretty solid prospect. The stock can make some very sudden movements with a low average trading volume of just over 27,000 shares, so best to watch it for a little while before jumping in. If you want a nice long play with a dividend as a plus, $3.50 a share on a down day might be a good time.

These stocks still face an uphill battle with potential cuts to pell-grants and other critical government funding being the biggest issue that they face. Washington's inability to tackle the deficit only heightens these concerns, however, cuts in education currently seem to be taboo for politicians in search of a future in Washington. Since many of these educational institutions are filling a void in this stagnant economy, it is doubtful that this life support will be cut anytime soon. As far as the perception of taking the student's money and awarding bogus or unearned degrees, only time and more evaluation will tell. As far as having houses that are in order and financials to fill three car garages, this borough is full of them.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.