H.J. Huneycutt

The Short Case on Strayer Education

User,

I look at this from the other direction as you do. Even assuming these companies weren't overvalued by every conceivable measure IMO, I'm not so sure the outlook for them gets better because of an economic downturn. I think the reverse is more likely.

These for-profit universities are extremely expensive and with the economy down, there's absolutely no guarantee that one will find a job after obtaining their degree. Hence, why spend tens of thousands of dollars on a second-rate education when you're not even sure if your investment will ever pay off?

Plus, the other thing to think about - the people attending these universities are normally already employed. They go to the for-profit universities because they are more flexible than traditional universities. As unemployment moves above 10%, people are suddenly going to find themselves with more time and with little need for the flexibility offered by DeVry, Strayer, UofP, etc. In such a scenario, a state school with dramatically lower tuition fees is much more attractive.

Even with Aggressive Valuation, For-Profit Education Stocks Seem Overvalued

Misha, I totally agree with you. In particular ...


"The quality of education in for-profits is poor. Any student who can get into almost any state school with names like University of ABC (insert the name of your state), ABC State University should avoid these for-profits."


You're right on the nose with that one. That's also part of my reasoning here. I think these stocks are aggressively valued even ignoring that, but a prolonged recessionary environment probably means that people are going to be more cost-conscious about their education. Employers look at a degree from [insert state] University as much more valuable than a degree from University of Phoenix Online. That's just the way it is, so I don't see these insane growth prospects that many others forecast panning out. Also, a lot of the people attending these for-profit institutions are people who already have jobs and don't have the time to attend a traditional university. If anything unemployment does not bode well for this group.

I'm also in agreement about the political environment shifting on this. The Bush Administration was probably a bit overly friendly when it came to these companies; some of which are arguably quite predatory towards their students. I'm not normally one to make investment analysis based on what the government does, but this is one sector where government attitude might be critical and I think there's going to be somewhat of a reversal of attitude on this.


As a random aside, I do find it ironic that there is a University of Phoenix Online ad to the left of this article right now.

Even with Aggressive Valuation, For-Profit Education Stocks Seem Overvalued

Also, let me be clear as to why I assign a $20 valuation to APOL --- based solely on a DCF analysis, I'd probably be willing to pay $40-45 for them. However, to me, the Citron report is extremely damning. You can say Citron is only supporting their own shorts, but they have a pretty good track record at sniffing these things out. Moreover, everything they say makes a lot of sense in regards to APOL.

Based on that, I think investors need to aware that there are greater risks than normal with APOL. If Citron is right, it could be an extremely huge blow to Apollo and the stock could tumble quite a ways. If I'm thinking about buying this stock, should that be on the back of my mind? You betcha!

Hence, I would discount the stock heavily based on that; just as people are discounting bank stocks based on fears that their assets might not be all they are cracked up to be. Notice that I did not do the same thing with DV and STRA; I think both are overvalued right now, but I'm not sure the concerns go deeper than that.

Even with Aggressive Valuation, For-Profit Education Stocks Seem Overvalued

User,

To be honest - I think you're displaying an emotional bias based on your own vested interest in APOL.

My claim that the $2.50 figure is the most realistic figure for APOL is based on my belief that the latest fiscal year is an abberation and that APOL's earnings in particular are suspect. For the three prior fiscal years, their FCFs were closer to $3 per share than $5. However, I clearly stated that this was merely my opinion on the matter. If you disagree, that's fine, but don't see any justified reason for your hostility. It's not as if I did not present readers alternate scenarios and my second DCF for APOL actually came up near the actual price.

I also misspoke when I said APOL achieved $5 in FCFs for the most recent fiscal year; I meant that they achieved $5 for their most recent four quarters; a minor difference but a notable one --- they only achieved $3.88 in FCFs for their most recent fiscal year, but they claimed very huge FCFs in their most recent quarter which helps bump the figure upwards for the past 4 quarters. The most recent quarter appears to be an abberation. However, since my null hypothesis is that APOL is "overvalued", I base my initial calculation on those aggressive figures.

I don't see a 20% growth rate as realistic or advisable for a DCF analysis; particularly when earnings suddenly jump. $4 per share in FCFs seems fairly aggressive to me when it comes to APOL. $4 with a 20% growth rate for a few years seems even more aggressive. $4 with a 5% constant growth rate is aggressive enough. It's really difficult to see even two to three years in the future so it's silly to assume high levels of growth beyond a year or so. The fact that I use a 5% constant growth rate in most of these scenarios is really fairly aggressive by most standards; 3% would be closer to the norm.

Three Thriving Companies: Wal-Mart, Apple, Apollo Group

I think Linux poses more of a threat to Microsoft than Apple, particularly in the current environment. As people have less discretionary income, they are going to look for ways to cut back and open source is cheaper from a consumer perspective. Ubuntu and some of the other Linux variants are easy enough to use that consumers will consider embracing them.

Three Thriving Companies: Wal-Mart, Apple, Apollo Group

I definitely agree that Apollo is overvalued right now. However, I think it's worth mentioning that there are some who disagree that they are "thriving". Citron Research has called into question some of their practices:

www.citronresearch.com.../


I'm not sure that I'd agree that Perini's run is "unsustainable". They still look undervalued to me at $20.

Wal-Mart will continue to perform well during the recession or even during a potential depression, but their stock appears slightly overvalued to me, so there's probably little upside. I'm not sure if Aldi poses a threat or not since I've never been to one in my life - but I think that high gas prices are the biggest threat to Wal-Mart. Their business model relies upon an assumption that people are willing to travel sizable distances for discount prices --- it doesn't necessarily hold true if gasoline is $5 per gallon. But so long as oil prices stay suppressed, Wal-Mart's grocery sales will benefit. And if there is a depression, oil will probably stay suppressed. Of course, on the downside, Wal-Mart's retail sales will decline in an economic downturn: I think investors have ignored that leading to a slight overvaluation.

Even with Aggressive Valuation, For-Profit Education Stocks Seem Overvalued

User,

Your assertion that I started my DCFs based on 50% of current FCFs is blatantly false. It makes me question why you remain anonymous and whether or not you have an agenda here. If you read the article, you will find that in many cases, I started the DCFs with FCFs that were much, much higher than what these companies have historically produced.

Strayer's most recent FY FCFs were around $4.60 per share, yet I used an $8 per share starting point to show the absurd level of expectation built into the current price. Can you explain to me how $8 is 50% of $4.60? Pull out a calculator and you'll find that $8 is a 74% increase from $4.60 - highly unrealistic and yet, a DCF analysis based on that and a low cost of capital still comes up with a lower valuation than the one the market is giving.

Also, you haven't seen my DCF model, so it's strange that you would have the ability to dissect and analyze it. If you disagree with my analysis, that's fine, but your behavior suggests to me that either you have a vested interest here or that you are unable to conduct yourself in a professional manner. You are being dishonest in your criticisms as anyone who reads through the article can see I never started any of my models based on a 50% drop in free cash flows.

I explained all the numbers for my DCF models and why I used them - if you don't believe those to be accurate, then you're free to disagree, but you're doing a disservice to readers by pretending you're an expert on valuation. Stocks are ownership stakes in a company and there is a real underlying value. Stocks that are "overvalued" based on fuzzy valuation metrics are more likely to crash. If you don't believe valuation matters, that's fine, too - there are people who'd rather follow "stock psychology", but I'd argue those are the types of people who get killed during bubbles.


You really only make one valid point in your rant. I did not explain why I would value APOL at $20 with much detail. It is based on the fact that I view my last DCF analysis of them to be overly optimistic, plus concerns about honesty of management and validity of their financial reporting should lead shareholders to discount the stock further. So if my DCF comes up with a valuation near $40, then I need to discount further beyond that and I think a 50% haircut is about right given the Citron Report on APOL.