Which of These 7 For-Profit Education Stocks Is Best for Your Portfolio?

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 |  Includes: APOL, CECO, COCO, DV, EDMC, ESI, STRA
by: Investment Underground

The battle for increased oversight over the for-profit education industry began with the Department of Education, led by Arne Duncan, piloting the requirement that for-profit vocational programs yield "gainful employment," as measured by the ratio of salary to loan debt among graduates. We still think there is value in the for-profit space. Here are 7 names to consider:

Apollo (NASDAQ:APOL) made $4.92 billion in revenues in FY 2010 through August, which was an increase of 23.94%, after rising by 26.53% in FY 2009. However, net income fell by 7.57% in FY 2010 to $553 million, after growing by 25.56% in FY 2009. EPS fell by 3.47% to $3.62, after jumping by 30.66% in FY 2009.

The respective EBT margins were 20.32% and 26.16%. The company posted a return on invested capital of 30% in FY 2010, and 37.75% in FY 2009.

Q1 2011 results showed that revenues were up by 4.4% compared to Q1 2010. EPS for the trailing 12 months is $3.64, which implies a P/E of 11.8.

"During the first quarter of fiscal 2011, we began the important process of implementing several of the key strategic initiatives that we've been developing in recent quarters and that are designed to enhance the student experience, expand student protections and ensure that we enroll students who we believe have a greater likelihood to succeed in our programs," said Apollo Group Co-Chief Executive Officer and Apollo Global Chairman Greg Cappelli. "While we do not yet have enough data from these new initiatives to draw firm conclusions, we are pleased with the early results."

Apollo Group Co-Chief Executive Officer Chas Edelstein added, "While these initiatives are resulting in a period of transition, we expect to prudently manage our cost structure to appropriately align it with both the size of the business and the needs of our students. We believe these actions are the right things to do for our students, and importantly, we are confident that over time they will solidify our leadership role within the industry and put our organization on a path of more consistently delivering high quality growth."

Some of these initiatives include:

  • Changes in the roles of the company’s admissions personnel and comprehensive changes in their evaluation and compensation systems, including the elimination of enrollment results as a component of compensation effective September 1, 2010
  • University Orientation, a free, three-week, non-credit bearing program which, beginning November 1, 2010, will be required for all new students enrolling at University of Phoenix with fewer than 24 transfer credits
  • The continued reduction in emphasis on third-party affiliates for lead generation and other enhancements to the Company's marketing approach.

The company will report Q2 2011 results on Tuesday, March 29.

The company also recently lost a verdict to cancel a verdict, where it owes shareholders $277.5 million.

We anticipate that operating margins will fall to 22% in 2011 as the orientation program and restructuring measures kick into full gear, and we expect revenue growth to average 1% over the next 5 years. Both enrollment and earnings growth are likely to resume by 2014, putting positive pressure on margins. Shares are worth $75 apiece based off our discounted cash flow estimate.

Strayer Education (NASDAQ:STRA) pulled in $637 million in revenues in 2010, which was an increase of 24.37%, after showing growth of 29.19% in 2009. Profits grew by 24.92% to $131 million. In 2009, profits grew by 30.03%. The respective EBT margins were 34.08% and 33.94%. In 2010, EPS was at a healthy $9.70, which implies a P/E of 14.5.

Based on the enrollment growth announced for the 2011 winter term and the planned investments in opening new campuses, the company estimates Q1 2011 EPS should be in the range of $2.65 to $2.67. Also, the company announced that it will open 2 new campuses for the 2011 spring term, one of which is in a new market. The first new campus is located in Indianapolis, Indiana, a new market for Strayer University. The second new campus is located in Dallas, Texas, representing the University's third campus in that market. Including the 3 new campuses successfully opened for the 2011 winter term in Cincinnati and Dayton, Ohio and Milwaukee, Wisconsin, the Company has now opened 5 of the 8 new campuses planned for 2011.

STRA shares have a current yield of 2.8%. In 2010, the company returned 71.76% on invested capital, and in 2009, the same figure was 57.44%. Moreover, the company has no debt on its books.

Corinthian Colleges (NASDAQ:COCO) made $1.7 billion in revenues in FY 2010 through June, which was an increase of 34.86%, after rising by 22.38% in FY 2009. Profits also jumped by 112.29% to $146 million, after posting a gain of 223.32% in FY 2009. The respective EBT margins were 13.68% and 8.96%. EPS also grew by 108.86% to $1.65, after rising by 216% in FY 2009. The company also returned 18.82% and 13.15% on invested capital in FY 2010 and FY 2009, respectively.

Through Q1 and Q2 2011, revenues were up by 22.8% when compared to Q1 and Q2 2010. Yet, there was a net loss incurred of $131 million during the half-year 2011. This was attributed to an impairment test which indicated that all goodwill, with the exception of goodwill associated with theHeald Collegeacquisition, was impaired. The cost was $206 million against earnings.

The company gave guidance for Q3 2011: revenues of $462 - $472 million, EPS of $0.20 - $0.22, and new student reductions between 15% and 17%. In Q3 2010, EPS came in at $0.45 with revenues of $478 million.

Corinthian is one of the largest post-secondary education companies inNorth America. The company offers diploma and degree programs in areas, such as health care, business, criminal justice, transportation technology and maintenance, construction trades and information technology. It has 122 Everest, Heald and WyoTech campuses, and also offers degrees online.

DeVry (NYSE:DV) made $1.9 billion in revenues in FY 2010 through June, which was an increase of 31.05%, after +33.85% in FY 2009. Net income grew by 69.01% to $280 million, after +31.93% in FY 2009. The respective EBT margins were 21.54% and 16.24% with ROICs of 25.09% and 17.14%. EPS also grew by 69.74% to $3.87.

For the half year ended in December 2010, revenues grew by 18.5%, profits rose by 28.3%, and EPS increased by 28.49% compared to the same period in 2009. For the trailing 12 months, EPS was $4.44, which implies a robust P/E of 11.9.

DeVry is a global provider of educational services and the parent organization of Advanced Academics, Becker Professional Education, Carrington College, Carrington College California, Chamberlain College of Nursing, DeVry Brasil, DeVry University, and Ross University Schools of Medicine and Veterinary Medicine. These institutions offer a wide array of programs in business, healthcare and technology. DeVry's institutions serve students in secondary through postsecondary education and professionals in accounting and finance.

ITT (NYSE:ESI) drew in revenues of $1.59 billion in 2010, which was an increase of 21.02%, after growing by 29.93% in 2009. Profits came in at $374 million, which was an increase of 24.61%, after jumping by 47.93% in 2009. The respective EBT margins were 38.47% and 37.25% with good ROICs of 128% and 93.19%. EPS also grew by 41.21% to $11.17, after growing by 53% in 2009. The P/E ratio is 6.4.

The company announced that for fiscal 2011, it expects EPS to be $8.50-10.50.

The company was in a tiff with Senator Harkin, regarding his comments on the company’s allegedly high-pressure sales tactics. This is part of a broad effort by Congress to target for-profit education.

The company provides accredited, technology-oriented undergraduate and graduate degree programs through its ITT Technical Institutes and Daniel Webster College. It owns and operates more than 120 ITT Technical Institutes and Daniel Webster College. ITT/ESI serves approximately 80,000 students at its campuses in 38 states and online. Headquartered in Carmel, Ind., it has been involved in the higher education community since 1969.

Career Education (NASDAQ:CECO) made $2.1 billion in revenues in 2010, which was an increase of 15.66%, after growing by 7.7% in 2009. Profits grew by 94.26% to $158 million, after growing by 35.05% in 2009. The respective EBT margins were 11.62% and 12.20% with ROICs of 16.96% and 8.67%. EPS also jumped by 107.45% to $1.95, which implies a P/E of 11.4. In 2009, EPS rose by 40.3%.

The company expects revenue to decline in the 2% to 5% range versus 2010.

The colleges, schools and universities that are part of the Career Education Corporation (CEC) family offer education to a student population of more than 116,000 students across the world in a variety of career-oriented disciplines through online, on-ground and hybrid learning program offerings. The more than 90 campuses that serve these students are located throughout the US, France, Italy, the United Kingdom and Monaco, and offer doctoral, master's, bachelor's and associate degrees and diploma and certificate programs.

Those institutions include, among others, American InterContinental University, Brooks Institute, Colorado Technical University, Harrington College of Design, INSEEC Group Schools, International University of Monaco, International Academy of Design & Technology, Istituto Marangoni, Le Cordon Bleu North America, and Sanford-Brown Institutes and Colleges. Through its schools, CEC is committed to providing high-quality education, enabling students to graduate and pursue rewarding career opportunities.

Education Management (NASDAQ:EDMC) made $2.5 billion in revenues in FY 2010 through June, which was an increase of 24.71%, after growing by 19.43% in FY 2009. Profits rose by 61.4% to $169 million, after +58.22% in FY 2009. The respective EBT margins were 9.97% and 8.23% with thin ROICs of 4.82% and 3.08%. For the trailing 12 months, EPS was at $1.78, which implies a P/E of 10.8.

In the half year ended December 2010, revenues were up by 20.94%, profits increased by 236.1%, and EPS shot up by 222.2%.

For Q3 2011, net income and EPS are respectively expected to be between$64 million and $68 million,and $0.46and $0.48. In comparison, in Q3 2010, EPS was $0.59, and net income came in at $85 million. For FY 2011, net income and EPS are expected to be between $230 million and $237 millionand$1.63and $1.68, respectively.

Education Management is among the largest providers of post-secondary education inNorth America, based on student enrollment and revenue, with a total of 104 locations in 31 U.S. states andCanada. It offers academic programs to students through campus-based and online instruction, or through a combination of both. Its educational institutions offer students the opportunity to earn undergraduate and graduate degrees and certain specialized non-degree diplomas in a broad range of disciplines, including design, media arts, health sciences, psychology and behavioral sciences, culinary, fashion, business, education, legal and information technology.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.