Comparing America's 3 Largest Education And Training Services Companies

Includes: APOL, ATGE, HMHC
by: Joseph Cafariello


The Education & Training Services industry is expected to outperform the S&P broader market moderately this quarter and substantially next quarter, underperform significantly in 2015, and outperform meaningfully beyond.

Mean/high targets for the 3 largest U.S. Education/Training Services companies – Apollo Education Group, DeVry Education Group, Houghton Mifflin Harcourt - range from 4% below to 15% above current prices.

Find out which among Apollo, DeVry and Houghton offers the best stock performance and investment value.

* All data are as of the close of Thursday, December 4, 2014. Emphasis is on company fundamentals and financial data rather than commentary.

Where once the Education & Training Services industry proudly made the honor-roll of top performing industries, it has over the past few years been slowly moving to the back of the class. And it has much to do with jobs. Not jobs within its industry, but without.

As per the graph below of employed persons in the U.S., during the last recession from late 2007 to late 2009 more than 8 million jobs were lost as the number of employed persons plunged from over 146 million to 138 million in the space of just two years.


Looking at the performance of the Education & Training Services industry during that recession as per the graph below, we notice one very important strength for the industry: it performs very well when jobs are being cut.

Where the broader market S&P 500 index [black] fell 56% by the time the market reached its bottom on March 9th, 2009, the two largest U.S. Education & Training Services companies - Apollo Education Group, Inc. (NASDAQ: APOL) [beige] and DeVry Education Group Inc. (NYSE: DV) [blue] - actually rose, some 38% and 30% respectively. Those are some mighty impressive test results, passing ahead while almost every other industry was failing miserably.


It would seem elementary that education and training services would do very well in a period of economic contraction where jobs are being cut left, right and center, as many displaced workers evaluate their options and decide to go back to school or retrain for other positions.

But something catastrophic happened to the education industry when the economy started picking up again. As per the employed persons graph above, more than 9 million jobs have been created from the end of 2009 until today. With more jobs coming back online, education and retraining were no longer as necessary as before. Hence the industry's poor performance since then, as graphed below.

Since the economic recovery began in March of 2009, where the broader market S&P 500 index [black] has gained 205%, DeVry has risen a mere 12% while Apollo has fallen 52%. The nation's third largest company in the industry - Houghton Mifflin Harcourt Company (NASDAQ: HMHC) [orange] - has been publicly traded only since November of 2013, and has gained a respectable 25% since.

On an annualized basis, where the S&P has averaged 36.18%, Houghton has averaged 23.08%, DeVry has averaged 2.12%, and Apollo has averaged -9.18% per year. Clearly there have been better places to send your money to school.


Yet we mustn't forget how many employers in the technology, engineering and healthcare sectors are having a difficult time finding qualified workers for their numerous unfilled high-skill positions. So it's not as if a recovering economy spells the end of the Education & Training Services industry's growth.

In fact, there is still plenty of growth to be enjoyed by the industry looking forward, as tabled below where green indicates outperformance while yellow denotes underperformance.

Over the immediate term, while the industry's earnings are expected to slightly outgrow the broader market's average growth rate this quarter, growth is seen reaching 6.96 times the S&P's rate next quarter. Come 2015, the industry is expected to fail somewhat, before earnings earn a higher grade over the longer term.

Zooming-in a little closer, the three largest U.S. companies in the space are expected to split perform as tabled below.

Throughout the calendar, Apollo and Houghton couldn't be farther apart in earnings, like two bookends at either end of the shelf - with Apollo shrinking heavily near term, outperforming the market in 2015, and then relapsing into shrinkage beyond, while Houghton keeps advancing with a slight exception next quarter, on its way to beating the market at some 12.52 times its growth rate in 2015, before market-performing longer term.

In the middle of it all sits DeVry, drawing little attention to itself as it shrinks a little near term. But over the next five years it seems to finally hit the books to score the best grades in its class over the next five years.

Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?

Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.

A) Financial Comparisons

• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.

• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.

Since several trailing growth figures are not available, neither metric will factor into the comparison, though it is worthy of note that the figures which are available do not earn any stars by their names.

• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.

Of our three contestants, DeVry operated with the widest profit margin, Apollo enjoyed the widest operating margins, while Houghton contended with the narrowest.

• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.

For their managerial performance, Apollo's management team delivered the greatest returns on assets and equity, where Houghton' team delivered the least, even shrinkage in both.

• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.

Of the three companies here compared, Apollo provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Houghton's DEPS over current stock price is lowest, even negative denoting loss.

• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.

Among our three combatants, each company's stock is cheapest relative to a different ratio, as well as being most overpriced relative to a different ratio.

B) Estimates and Analyst Recommendations

Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.

• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.

Of our three specimens, DeVry offers the highest percentages of earnings over current stock price for all time periods, while Houghton offers the lowest percentages for all periods.

• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.

For earnings growth, Houghton offers the greatest growth over the immediate term and 2015, where DeVry promises it over the next five years. At the slow growth end of the spectrum, Apollo is seen growing the slowest overall, and shrinking most of the way.

• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.

For their high, mean and low price targets over the coming 12 months, analysts believe Houghton' stock offers the greatest upside potential and least downside risk, while Apollo's stock offers the least upside and DeVry's offers the greatest downside.

It must be noted, however, that Houghton's stock is already trading below its low target. While this may mean an increased potential for a sharp move upward, it may warrant a reassessment of future expectations.

• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.

Of our three contenders, Houghton is best recommended with 2 strong buys and 2 buys representing a combined 57.14% of its 7 analysts, followed by DeVry with 2 strong buy and 2 buy ratings representing 33.33% of its 12 analysts, and lastly by Apollo with 2 strong buy and 2 buy recommendations representing 30.76% of its 13 analysts - each having the exact same numerators but slightly different denominators.

C) Rankings

Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.

In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.

The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.

And the winner is… DeVry certainly teaches its peers a thing or two, outperforming in 9 metrics and underperforming in 4 for a net score of +5, followed far behind by Apollo and Houghton in a tie, each scoring -3. As tiebreakers go, second place will go to Houghton for having scored slightly more first place finishes.

Where the Education & Training Services industry is expected to outperform the S&P broader market moderately this quarter and substantially next quarter, underperform significantly in 2015, and outperform meaningfully beyond, the three largest U.S. companies in the space are expected to contrast one another markedly in their earnings growth, with Houghton at the front of the class, DeVry in the middle, and Apollo shrinking in his seat at the back.

Yet after taking all company fundamentals into account, DeVry Education Group earns the most stars on its forehead given its lowest stock price to forward earnings, lowest debt over market cap, highest profit margin, highest future earnings over current stock price for all time periods, highest future earnings growth over the next five years, and highest dividend - decisively passing the Education & Training Services industry exam.