A Renewed Value Proposition For U.S. Education Companies

by: David J. Waldron

Beginning in the 1970s, Apollo Group, Inc. founder, John Sperling, pioneered an unprecedented growth of the for-profit education industry in the United States, from a sleepy group of privately owned trade schools, to today's more behemoth publicly traded operators.

Apollo offered a then profound value proposition to the proliferation of working adult students: an alternative learning environment to the largely post-high school, youth-oriented, traditional colleges and universities of the time. This new education model soon became a hit; and just as hit songs get emulated in the music industry, hit business models get cloned on Wall Street and Main Street. Many established operators soon jumped on the bandwagon. Start-ups flourished in the wake. In 1991, DeVry, Inc. one-upped Apollo Group by becoming the first publicly-held U.S. education provider, followed by IPOs from Apollo and ITT Educational Services in 1994.

An Industry on 'Hold' in the Face of an Historical Bull Market

Today, there are 14 publicly-traded U.S. companies deriving their primary revenues from post-secondary, educational services. As suggested by the CVCR Education Index, the first commercially available education industry benchmark, the group is collectively rated a consensus "hold" by the analysts covering the companies.

U.S. Publicly-Traded, Post-Secondary Education Companies

(in order by market capitalization)

Company Symbol Market Cap($000's)



Apollo Group APOL 2,360,000 1994 Hold
DeVry DV 1,970,000 1991 Hold
Grand Canyon Education LOPE 1,500,000 2008 Buy
Education Management EDMC 894,640 2009 Hold
American Public Ed. APEI 679,560 2007 Buy
Bridgepoint Education BPI 676,360 2009 Hold
ITT Educational ESI 606,480 1994 Sell
Strayer Education STRA 602,600 1996 Sell
Capella Education CPLA 540,200 2006 Hold
Universal Tech. Inst. UTI 290,040 2003 Sell
Corinthian Colleges COCO 229,670 1999 Hold
Career Education CECO 201,810 1998 Sell
Lincoln Educational LINC 161,050 2005 Sell
National American U. NAUH 97,050 2007 Buy
Market Cap/Rating** $10,809,460 Hold

Source: *Zacks Investment Research/MSN Money (market cap and average analyst recommendations as of May 21, 2013) **CVCR Education Index/Country View Capital Research, LLC (based on averaged analyst consensus ratings as of May 21, 2013) Note: EDMC originally went public in 1996; taken private in 2006; and public again in 2009.

Only three of the companies are rated "buys" (LOPE, APEI, and NAUH); six are averaged "holds" (APOL, DV, EDMC, BPI, CPLA, and COCO); and five are consensus "sells" (ESI, STRA, UTI, CECO, and LINC) by the sell-side analysts. The CVCR Education Index averages these ratings to an industry-wide 'hold.'

As widely reported since 2010, high student default rates, a weakened job market, accreditation issues, and mainstream media criticism, has led to lowered enrollment, falling profits, and the inevitable downgrades, short interest, and sell-offs. Granted, the index is up about 8% YTD, bull market notwithstanding.

From a relative historical perspective, investors are analyzing whether these companies, individually, or collectively, are deep value opportunities in the tradition of legendary investor Sir John Templeton; or fundamentally unsound value traps when considering the teachings of investment pioneer Benjamin Graham.

Japan's Legendary TQM as a Rekindled Value Proposition

In the global economy that emerged immediately after World War II, products manufactured and exported by Japanese multinational companies were considered by many Americans to be cheap, low-quality imitations. Granted, a prejudice toward the Japanese, post WWII may have deceptively played into that perception, but a renowned renaissance in the Japanese business culture began to emerge. The response from Japan was famously engineered by American statistician W. Edwards Deming, among others, and became commonly known as total quality management or TQM.

By the late 1960s and early 1970s, led by the likes of Toyota and Sony, Japan's subsequent shift toward quality control and customer satisfaction dramatically and profitably reinvented the previous negative view. The Japanese multinationals flourished. Ironically, the resurgence of Japan occurred not long before the introduction of Apollo Group's adult learner model.

Akin to the reinvigorated Japanese manufacturers of the last half of the 20th century, private sector education is expected to survive and prosper in the new global economy of the 21st century, driven primarily from a critically needed contribution to the workforce development infrastructure.

But who among the education services companies will emerge as the industry's Toyota or Sony, singlehandedly improving the poor quality, low return perception of for-profit education in the U.S.?

Investors who figure this out now, while prices are relatively cheap, should benefit and ultimately make the likes of Sir John Templeton, Ben Graham, and perhaps even John Sperling, proud of a successful and timely value assessment of U.S. education operators.

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. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The CVCR Education Index is an illustrative benchmark gauging the U.S. education services sub-industry within the consumer discretionary sector. The index provides a narrow snapshot of its target industry's collective company constituents for research purposes only and is not intended as a marketable security, as investment advice, or for portfolio construction. The CVCR Education Index is published and copyrighted by Country View Capital Research, LLC and cannot be copied, marketed, benchmarked, or disseminated without the express written permission of Country View Capital Research, LLC.

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