Back to School with These Education Stocks

The higher education industry has had a difficult time since the past few years due to lower student demand, regulatory restrictions and competitive environment. Though for-profit colleges are the fastest growing segment of the postsecondary education sector, most of these have witnessed a sharp decline in enrollments in the past few quarters.

Why the Apathy for Higher Education?

Perhaps it's right to blame the lackluster macroeconomic environment. The value proposition of a formal college degree is declining due to increasing tuition rates and an overall constrained discretionary spending environment. Enrollments have thus been sluggish across the entire higher education system in the United States for the past few years as prospective students are apprehensive about the value of pursuing a degree given the lack of confidence in the job market.

Binding Regulations Add to the Gloom

Education companies derive a significant portion of their revenues from federal student financial aid programs, referred to as Title IV programs, which are administered by the Department of Education (DoE). Most students rely on these loans to meet the cost of their education. The regulations and policies of the DoE, state education agencies and the accrediting agencies change frequently.

In order to participate in Title IV funds, these companies have to abide by extensive rules and regulations. These include maintaining student loan default rates within DoE's standard, limitations on the proportion of its revenues that can be derived from federal student aid programs, elimination of incentive compensation to admissions advisors, standards of financial responsibility and administrative capabilities. Any failure to comply by these rules would lead to the institutions losing eligibility to participate in Title IV funds.

The widespread misuse of Title IV funds has brought educational institutes increasingly under the scanner. The DoE has proposed that an educational program could only qualify for Title IV funds if it helps students achieve gainful employment in a recognized organization.

Any adverse ruling or even just the hint of an investigation from the DoE can cause a sharp decline in valuation. For example, Corinthian Colleges, Inc. COCO and ITT Educational Company ESI have lost significantly this year following strict government scrutiny of their programs. Last month, Corinthian announced plans to put up 85 of its campuses for sale and eventually shut down operations at another 12 as part of an operating agreement with the DoE which limited the company's use of Title IV funds. Corinthian had allegedly falsified job placement rates and misplaced student attendance records at some of its schools leading to strict DoE censure.

Intensifying Competition

With narrowing scope, competition among these schools for luring prospective students is intensifying. The companies are also up against traditional public schools which generally offer lower tuition prices.

How are Schools Getting Ready?

In order to boost enrollment growth, companies are offering scholarships to improve the affordability of their programs and attract the cash conscious American masses back to the campus. However, such efforts inevitably put pressure on revenue per student and thereby curb profitability.

With changing times, these companies also need to conduct ad campaigns, invest in digital capabilities and step up social media efforts to increase their brand equity. Companies are also building corporate and community college partnerships to educate their workforce as student retention/persistence within this channel is significantly higher than the traditional channels. Also, companies are improving their technology and infrastructure, increasing investments to improve the academic quality and student retention and regularly introducing new programs and specializations to improve student outcomes.

To improve profits, companies like DeVry Education Group Inc. DV and Apollo Education Group, Inc. APOL have resorted to aggressive cost-cutting measures through significant layoffs and campus closings.

3 Education Stocks Stand Out

In a sector that continues to struggle, we have chosen three great performing players which are executing well. These schools boast of steadily rising enrollments defying the broader macro pressures. Investors should note that this can only lead to strong revenue and earnings growth.

DeVry

Headquartered in Downers Grove, IL, this is a well-positioned company. Its diversified portfolio of programs, regular strategic acquisitions and turnaround efforts give it a competitive advantage.

DeVry's biggest advantage is its diversified offering of academic programs spanning across business, healthcare and technology. The company also serves accounting and finance professionals. This Zacks Rank #2 (Buy) company is quite diversified geographically with nearly 20% of its revenues coming from outside the U.S., mainly from Brazil. In the long term, the company plans to expand further in Latin America and to Asia.

DeVry has beaten the Zacks Consensus Estimate for both revenues and earnings in the last two quarters on better-than-expected revenues and aggressive expense control. Strong growth in its healthcare and international businesses is making up for consistent revenue and enrollment declines and low profits at its struggling flagship, DeVry University. Healthcare institutions like Chamberlain and Ross are especially doing well for the country needs more nurses and physicians. In fact, revenues at the Medical and Healthcare segment have grown at a 32% compound annual growth rate since 2008 and it is still going strong. Moreover, DeVry's medical schools produce strong student outcomes and have very low cohort default rates.

Capella Education Company CPLA

This Zacks Rank #2 company delivered strong sales and profits in the second quarter (results announced last week) on the back of double-digit improvement in student starts, which surpassed management expectations. Capella's share price jumped almost 14% in response to the unexpectedly strong results. The company expects positive growth rates in new enrollment, total enrollment and revenue through the rest of the year. Capella's differentiated FlexPath programs, improving student persistence, focus on high-quality offerings and a relationship focused brand marketing strategy make it all the more attractive.

Grand Canyon Education Inc. LOPE

This Zacks Rank #2 company is a small Christian postsecondary college. The company has beaten the Zacks Consensus Estimate for both revenues and earnings for six straight quarters. Improving enrollment trends, solid revenue growth and strong operating margins have been boosting results. Grand Canyon Education has been consistently witnessing enrollment growth on the back of its brand reputation, attractive ground-based campus, low tuition cost and growing demand for its healthcare programs. As the company expands its capacity, it shows potential for further growth.

Others Stocks Worth a Look

Some other education companies are also doing quite well. Even though Apollo Education Group carries a Zacks Rank #3 (Hold), the stock cannot be overlooked. Apollo Education recorded a sequential improvement in starts in all the three quarters of fiscal 2014 reported so far. Another notable school is Strayer Education Inc. STRA which has affordable programs, successful corporate relationships and robust online offerings. Strayer Education carries a bullish Zacks Rank #2 (Buy).

Conclusion

While challenges in the form of increasing competitive and regulatory pressure remain in the higher education sector, a number of for-profit education companies are seeing improvements in their financial results in 2014 due to their efforts to be different. These companies are looking for better strategies to emerge as winners inciting investor confidence.

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