Five Stocks That Make the Grade
Every recession has a silver lining, and this one finds it in for-profit education companies. With so many Americans joining the ranks of the unemployed -- the jobless rate stands at 7.6% and is expected to reach 9% this year --acquiring new skills is seen as a way to land a new job. And those who remain employed are padding their résumés with new credentials to stave off layoffs.
Technical schools benefit the most because they can retrain workers quickly for new careers. But even schools that offer associate, bachelor's and master's degrees are getting a piece of the action.
In the meantime, school stocks are soaring, blithely sidestepping a bear market that has trampled virtually every other sector. Over the past year through February 25, Corinthian Colleges stock has jumped 158%, ITT Educational Services has increased 117%, and Career Education has advanced 71%, to just name a few big winners. Below, we describe five stocks that make the grade.
ITT Educational Services (symbol ESI) is the most countercyclical of the school companies; it's the one most likely to benefit the most from a sagging economy. ITT's programs are geared toward trades such as information technology, drafting and design, and health sciences. Serving 61,000 students, ITT offers mostly in-person offerings because its specialties don't lend themselves well to online learning.
The Indianapolis-based company's growth has been impressive. In 2008, enrollment was up 17% and average revenue per student increased 3%. "We had a sense that this was a countercyclical business that would see strong demand, but some of the enrollment numbers have been really incredible," says Bill McVail, manager of the Turner Small Cap Growth fund and one of the coauthors of a recent report on education stocks.
The ITT story is hardly a secret. The stock, which closed at $117.29 on February 25, has already risen 23% so far this year. It now trades at 18 times the midpoint of the company's forecasted earnings for 2009 of $6.50 to $6.75 per share. ITT upped its guidance on February 24 from a previous range of $6.25 to $6.45 per share. The company earned $5.17 per share last year.
Apollo Group (APOL) is the largest for-profit education operator in the U.S., serving more than 380,000 students, primarily through its University of Phoenix network. These schools, which offer many online classes, are geared toward working adults.
In recent years, Apollo has added associate-degree programs through the Axia College system. Enrollment in that segment jumped 38% in 2008. "There's definitely more growth in the associate-degree area," says Jeff Auxier, manager of the Auxier Focus fund. But, he cautions, those students tend to be younger, and because they don't have the credit history of working adults seeking bachelor's degrees they could have trouble securing loans in a tight credit market.
Still, the push into associate degrees is helping Apollo, based in Phoenix, score big profit gains. In its first fiscal quarter, which ended November 30, earnings soared 29% and revenues rose 24%. Analysts expect profits to climb 38% in the fiscal year that ends next August, to $3.80 per share. The stock, at $75.77, trades at 20 times forecasted profits. It has advanced 22% over the past year. Moreover, Apollo has an enviable balance sheet. The company has no debt and holds $800 million in cash and marketable securities.
Strayer Education (STRA), which also offers both associate and bachelor's degrees for working adults, gets high marks for its measured approach to growth. Based in Arlington, Va., the company makes acquisitions only sparingly and adds just eight to 11 campuses per year.
With only 45,000 students, Strayer is one of the smaller for-profit education companies, so it has the most opportunity to grow. To increase its student base, Strayer has aligned itself with a network of community colleges and offers students who graduate from them automatic acceptance.
Strayer stock often trades at higher price-earnings ratio than other school stocks, but that premium has slipped recently. At $173.44, the stock trades at 25 times expected 2009 earnings of $7.00 per share. But since the company announced on February 12 that first-quarter profits would likely come in at $1.96 to $1.98 a share, below the $1.99 forecast by analysts, the stock has shed 7%. "The market has really beaten up the stock over a penny," says Morningstar analyst Todd Young. Still, the 2009 forecast represents a 23% increase in earnings from 2008.
Capella Education Company (CPLA) isn't as countercyclical as the other companies because it focuses on the higher end of the education market; 80% of its students are enrolled in master's and doctorate degree programs. "Although Capella would not benefit as much as trade schools from increased demand during weak economic times, Capella's more financially mature customers are less likely to drop out, helping to keep demand stable," Young wrote in a recent report.
On the other hand, Capella will probably outdo the others once signs of an economic recovery emerge. Many of its students receive tuition reimbursement from their employers, which are more likely to boost spending on benefits once the economy improves.
The Minneapolis-based company's recent results qualify for the honor roll. New enrollment was up 17% in 2008. As a result, earnings rose 25% last year, to $1.66 a share. At $58.86, Capella trades at 27 times estimated 2009 earnings of $2.20 a share.
Want to cash in on the craving for learning in China? Then consider New Oriental Education & Technology Group (EDU), the largest for-profit education company in China. The company focuses on English language instruction and test preparation. With 46 schools and 247 learning centers, it serves 1.3 million students. That's the same as the population of San Diego, McVail notes.
As China's economic growth has stalled, New Oriental has felt the squeeze. In mid February, the company cut earnings estimates for its third fiscal quarter (which ends in February), citing the weaker economy. Its stock, at $44.09, has fallen 20% since the beginning of the year. It trades at 28 times estimated earnings of $1.58 per share for the fiscal year that ends in May. That represents a 26% increase from the previous fiscal year.
The company's chief financial officer, Louis Hsieh, expects the effect of the slowdown to be short term: "Chinese families place a high propriety on spending for their children's education," he says. Richard Gao, manager of Matthews China fund, agrees: "Education-related spending is among the top consumer spending items in China, behind food and housing." If nothing else, Chinese parents will keep spending so that their kids can learn English, a skill that generally translates into 25% higher pay, says Gao.