Older Student Demographic a Boon for Apollo

As we pointed out in our August 2^nd Seeking Alpha article – Overlooked Education Sector: K-12 Poised to Prosper – the education sector, while viewed a safe, defensive play, is often overlooked as a great long-term growth play. A key factor that investors should examine when seeking companies with the best growth prospects in this sector is demographics.

Total U.S. enrollment in degree-granting higher education institutions (community colleges and four-year colleges an universities) is projected to grow by about 9 percent by 2017, according to the U.S. Department of Education’s National Center for Education Statistics. And while this is significantly below the 26 percent enrollment growth experienced between 1997 and 2007, the center projects that higher education enrollment of students over the age of 25 will rise by 19 percent by 2017.

This bodes well for the publicly traded for-profit higher education institutions that primarily serve the non-traditional, older, working adult population. These institutions have experienced significant growth over the past 10 years, increasing their share of the total U.S. enrollment from 1 percent to almost 9 percent as of 2009. The older student demographic, combined with President Obama’s education initiatives and some other emerging factors, should guarantee continued enrollment growth at these institutions during the coming years.

In particular, we feel that Apollo Group, Inc. (APOL), Strayer Education, Inc. (STRA), Bridgepoint Education, Inc. (BPI), Capella Education Company (CPLA), Grand Canyon Education (LOPE) and ITT Educational Services Inc. (ESI), among others, will continue to reap higher enrollments due to their focus on the non-traditional, older student. They should also continue to profit due to their emphasis on non-traditional, innovative teaching methods, such as on-line learning and computerized curricula.

On-line teaching/learning has grown tremendously in the past few years and degrees, certificates and courses by online education companies are rapidly gaining acceptance by employers, recruiters and students, according to Career College Association, the sector’s primary trade group. In fact, for-profit companies that primarily utilize on-line programs saw their enrollments grow faster last year than those with a greater reliance on campus-based classes. Along with giving students greater flexibility while in pursuit of their higher education goals, on-line learning gives the companies much higher operating margins, as they have much less of the traditional “brick and mortar” expenses.

President Obama, meanwhile, has proclaimed a national goal of increasing the number of college graduates so that the U.S. has the highest proportion in the world by 2020. A lofty goal, and one that traditional four-year and community colleges would likely be hard-pressed to fulfill on their own. While some analysts say the president’s initiative and proposed $12 billion funding will make the traditional schools more competitive against the for-profit institutions, others believe the funding is not significant enough to represent a threat, and that the initiative will prove complementary to for-profits (read story here).

Of the for-profit institutions that are geared towards on-line learning, the Apollo Group seems to be especially well-placed to see continued growth. Founded in 1976, the company generates about 95 percent of its revenues from the University of Phoenix, the largest private university in North America with a current enrollment of about 500,000 students, whose average age is about 35. The university, which was founded specifically to serve working, adult students who wished to complete or further their education to complement their professional responsibilities, offers more than 100 degree programs on a variety of levels that are offered both online and in traditional classrooms, usually a combination of both.

The university has experienced extensive growth since its founding, but successful efforts to lobby the federal government to modify the “50 percent” rule, which had required colleges and universities to conduct at least half of their instruction in person in order to receive federal aid or collect federal student loans, has provided an even more significant enrollment boost. In fact, the school was the top recipient of federal student financial aid funds in 2008, receiving almost $2.5 billion.

And while some critics point to higher loan defaults among the for-profit institutions, putting them in jeopardy of losing federal student financial aid eligibility, the University of Phoenix’s “cohort” default rate has ranged from between 4 to 7.5 percent over the past 14 years, below the 10 percent first tier default rate that results in a delayed release of financial aid, and far below the 25 percent that would lead to complete ineligibility.

Apollo’s revenues increased almost 27 percent between 2006 and 2008, while operating profit margins increased from 26 to 32 percent, largely due to rising enrollment. At a current price of about “67.50 it sells on an August 2009 price per earnings basis of 16.2, falling to 13.0 for August 2010. This places the stock on a PEG ratio of 0.53 for August 2010, assuming consensus earnings growth of 24.4 percent. The group has an excellent balance sheet with no debt and about $5.18 per share in cash. However, the company is expensive when viewed on a price to sales and price to book basis, where it sells on a trailing 12 month price to sales of 2.8 and price to book of 17.6.

We believe Apollo is an interesting demographic growth play in the education market, and its current PEG ratio of 0.53 allows further upside in the shares over the next 12 months. The only risk going forward is a reduction in the group’s gross margins, which we believe is unlikely given its expected three to five-year growth potential.

Disclosure: No current positions

Comments

[forprofited...:]

Relation to Unemployment:
Since the beginning of the current economic downturn the for-profit schools have benefited from increased interest in education. Historically, the for-profit schools have benefited from times of increased unemployment. It is generally believed that whenever the unemployment rate is above 3.5% for-profit education providers have ample consumer interest to continue growing their enrollments. The current economic downturn has driven significant enrollment growth at most of the for-profit EDU providers. The growth has been for both the Campus programs as well as online offerings. Find more at ForProfitEDU.com

Sep 08 10:34 AM

[bminfo247:]

Interesting. Obama's aggressive stance on education should have direct consequences to the performance of education stocks since they are highly dependent on government policy. Yahoo Finance has a great article on the subject:
finance.yahoo.com/news...

Sep 11 10:14 AM