School Stocks Soar, Remain Unattractive; Any Exceptions?

by: Kevin Kennedy
Beleaguered school stocks got some relief Friday after new regulations proposed by the U.S. Dept. of Education weren’t as tough as expected. It's not really enough to make them attractive yet, but it's a start.
Publicly-traded stocks in the U.S.-based education and training services industry jumped an average of more than 3.8% Friday. The group, attacked by short sellers and battered by tales of bad student loans and mixed results in training students for the work force, had suffered losses of more than 10% year-to-date that included a 22% drubbing in the past three months. The government released a preliminary version of the regulations in January, and uncertainty has hung over the group ever since.
The proposed rules aren’t a panacea for the industry, analysts say, and could still hurt schools with high debt-to-income ratios as a result of school loans, according to a report by Melissa Korn and Caitlin Nish for The Wall Street Journal. Schools also face greater scrutiny to ensure that their programs are actually preparing students for real jobs.
Leading the way higher Friday was DeVry (NYSE: DV), up 15.1% to 15.29. Other top gainers in the group included Nobel Learning Communities (Nasdaq: NLCI), up 9.0%; Strayer Education (Nasdaq: STRA), up 7.9% to 236.49; Education Management (Nasdaq: EDMC), up 7.5% to 16.31; Capella Education (Nasdaq: CPLA), +7.3% to 89.69; Grand Canyon Education (Nasdaq: LOPE), +6.6% to 23.12; Bridgepoint Education (NYSE: BPI), up 6.4% to 18.32; and Apollo Group (Nasdaq: APOL), which advanced 6.4% to 49.27.
The stocks of three companies that the rules are expected to impact more negatively struggled in Friday’s trading. ITT Educational Services (NYSE: ESI) edged ahead 0.3% to 85.44, while Corinthian Colleges (Nasdaq: COCO) slipped 0.5% to 10.20 and Universal Technical Institute (NYSE: UTI) gave back 0.7% and closed at 21.79.
The final regulations are expected to be adopted in November following a public comment period and take effect next year. Any penalties would not kick in until the 2012-13 school year.
The proposal would create three levels of schools and would likely impact about 5% of all schools serving about 8% of the roughly 1.8 million students enrolled in for-profit schools, reported John Lauerman for Bloomberg. Schools with high student debt-to-income ratios whose students are not repaying government loans fast enough would be restricted to growth limits and be forced to warn students in promotional materials.
The for-profit school industry received $26.5 billion in federal aid last year, a dramatic increase from $4.6 billion in 2000.
Despite today’s gains, none of the stocks in the group is close to being a market leader, and it will take a significant show of strength in the next several months to make the stocks attractive as new buys. Most of the stocks are closer to their 52-week lows than highs.
If I had to take a stab at one education stock that might emerge, it would be Minneapolis-based Capella Education. Today’s move brought it back to within 9% of its April 29 all-time high of 98.01. It’s a little pricy with a market cap of $1.5 billion and trading at 3.9 times sales, but its PE is reasonable at 31.
Capella operates Capella University, an online school with 42 graduate and undergraduate degree programs and more than 37,000 students. The company reported first-quarter earnings growth of 82% and revenue gains of 32% in April. The company is scheduled to report again next Tuesday, with analysts expecting second-quarter earnings to rise 41% to 79 cents per share and revenues to increase 29% to more than $103 million.
Disclosure: No positions