American Public Education, Apollo, Education Management: Highly Volatile, Yet Valuation Yields Second Chance

Includes: APEI, APOL, EDMC
by: DC Capital

The for-profit education services industry does not receive enough attention. It is simply overlooked and has significant room for growth. Historically, returns in this industry have been very volatile; however several key factors changing industry wide such as curriculum/program restructuring, lightened legislation, and adjustments in tuition prices to match consumer sensitivity make companies within this industry relatively attractive. I recommend focusing on American Public Education Inc (NASDAQ:APEI), Apollo Group Inc (NASDAQ:APOL), and Education Management Corporation (NASDAQ:EDMC).

Company Highlights & Valuation

APEI is leading the industry with their pricing strategy by a long shot. Since 2001, they have charged $250 per credit hour, and it has remained unchanged. Low tuition continues to benefit APEI by working towards lowering their exposure to high regulatory risk and through increasing enrollment by establishing a brand name with select niche target markets. For example, they have established a reputation throughout the military and have a high percentage of individuals enrolled as military students, and now they are focusing on capturing the civilian market. From a valuation standpoint, I calculated a YE target price of $40.50, by applying a forward multiple to their estimated earnings per share. See table below.

APOL is stronger in terms of their "brand name." They are better known than APEI and have a stronger retention base of students, which historically has helped them achieve strong above average growth. Using the same valuation method as before I calculated a target price of $42.60. Continuing the advancement of their student retention will be one of the key determinants in reaching this price target.

EDMC is the underdog of the group, one of the lowest price securities in the industry but one of my personal favorites for several reasons. Of the companies within this industry, they provide the greatest probability of abnormal returns with a business model that is very similar in nature. One of the greatest threats to their business is their pricing strategy. They engaged in a high pricing strategy for their basic tuition and that does not fly in this industry. Another thing I love about them is that they are highly diversified in terms of what academic programs they offer in comparison to their competitors, plain and simple. They offer a wider range of courses and degrees and appeal to a much larger target market. I calculated a target price of $6.50 using the same valuation method as above.

What is Real Risk of their Returns?

To evaluate historical performance and risk, I used the monthly holding period returns to perform the calculations presented in the table below. These calculations were done based off a sample of 48 for each company and for comparison to relative market performance, I used the S&P 500 as a benchmark. The calculations indicated APOL and APEI to be relatively similar in risk with standard deviations only differencing by about 2%, however EDMC shows a standard deviation of 22.67%, which is very high. This is not surprising considering the significant downfall in EDMC's market price per share in recent months, but their valuation is still there. They have a strong business model just as APEI and APOL, but suffered tremendously in recent months because of their pricing strategy. Pricing a premium for tuition above their competitors got them nowhere. But with adjustments in play, an upside in their share price is not by any means a long shot.

APEI and EDMC both have high kurtosis values; it is safe to conclude that their returns display leptokurtic return distributions, meaning that more frequently their returns deviate significantly from the mean as opposed to returns of a normal distribution. This makes APEI very appealing, with a relatively low standard deviation, yet frequent abnormal returns.


Overall it is fair to conclude this industry is exposed to a moderate level of risk and has significant room for growth. The demand for online education has augmented progressively in the past 10 years. Growth was stagnant industry wide, primarily as a result of consumer sensitivity to high tuition prices. Low, yet competitive pricing strategies have been implemented and a rise in returns is highly probable before year end.

Sources: All information, valuation, and risk metrics were retrieved from the CRSP database provided by Wharton Research Data Services.

Disclosure: I am long APEI, APOL, EDMC.