The market for post-secondary education is over $386 billion in the U.S. Couple that with the fact that only 35% of adults have more than a 4-year degree and you have a big opportunity.
Online education providers realize this and are changing the way millions of students get their education. Schools like University of Phoenix and DeVry (DV) have grown rapidly over the past decade and have no plans of slowing down.
The four largest providers in the online education market are all growing revenues in the 30% range YoY with solid cash positions and reasonable PE multiples given the growth rates. See YoY revenue growth rates below.
The value proposition is simple. Get a degree and increase your long-term earnings power. The data supports this at a macro level as the chart below illustrates.
Source: U.S. Bureau of Labor Statistics, 2009 annual data
Investors benefited from owning shares in the online education sector over the last decade. The chart below shows the 10 years returns as of the end of Q409 forApollo Group (APOL) +378%, DeVry (DV) +203%, ITT Education (ESI) +1143% and Strayer Education (STRA) +976%. Will this trend continue?
University of Phoenix is the leader in terms of revenue and students. Phoenix has over 420K undergrads and 78K graduate students dwarfing all public universitiesthat top out with ~50K students.
Profit margins in the sector are solid and relatively stable ranging from 15% to 25%.
Earnings yield provides a good way to compare returns vs alternative investments like the 10 year. APOL and ESI look the most attractive with earnings yields over 7%.
Many people question the benefits of getting a degree online and the value proposition of the leading companies in the sector. Below are some of the reasons often cited:
- When calculated by the federal standard used by the Department of Education, UOPX’s overall graduation rate is 16%, which, when compared to the national average of 55%, is among the nation’s lowest.
- For-profit education is heavily dependent on government funding. Title IV accounts for a large percentage of revenue at four largest companies.
- Online colleges spend a high percentage of profits on self-promotion/advertising that could otherwise be spent on improving the education. See chart below.
The online education sector has been attractive over the last decade from an investor standpoint. There are definitely issues with graduation rates and the general value provided to students, but if you are looking for a growth sector with strong fundamentals and a compelling macro story that tends to do well when unemployment rates are high, this is a sector to consider.
Disclosure: No positions
