For-Profit Education - Right for your Money?

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For-profit education is big business. There are schools like DeVry (NYSE: DV), textbook creators like Pearson, and countless amounts of web-based and mobile based apps, all targeting the education market. The higher education market in the United States is estimated to be worth some $475 billion yearly, and if we factor in continued education of $55 billion a year, we come to a final post-secondary education figure that’s north of half a trillion dollars per year!

HALF A TRILLION DOLLARS! That’s a lot of money. There are a lot of companies competing for this huge market by offering private degree programs. I’m talking about the likes of DeVry, a provider of technical based education, or Apollo Group (NASDAQ: APOL), the company behind The University of Phoenix, and others. As investors, we want to make money, so will these schools help our portfolio gain over the long term? Let’s take a look!

Are The Schools Sustainable?

These types of schools have to be sustainable to last and I don’t see it happening. I know, it’s early on to be getting that out there, but it had to be said.  The one, true advantage that these schools once had was the ability to do a full course online. Some public universities are now offering the exact same service and it is, at least in some instances, cheaper.

Public universities moving online isn’t the only issue that these for-profit colleges face, though.  They’ll soon see student federal aid gone. New federal regulations will stop all student aid dollars flowing to for-profit programs, a real kicker if your business is selling for-profit education.

If students can no longer get federal aid, and they can’t pay outright, then these schools will struggle. The only way to really thrive is for them to, in a sense, re-invent themselves. It will be difficult though; there are four week Ruby programming courses being offered in Silicon Valley that will give you a tuition refund if you can’t find a $60K job after graduation.  How can these schools compete with that?

Reinventing Time!

I’m at a loss for what these schools could do to thrive and potentially be worth an investment. I guess if I knew, I’d be running one of them. The schools have some services that are working out for them, technology, marketing and working with nontraditional students.

These schools need to find out a way to better leverage those advantages. Perhaps Apollo could team up with public institutions and become the online partner? How about DeVry helping schools set up technology based programs that people will enjoy? They have the knowledge, but can they put it to good use?

What if I Wanted to Invest?

If you want to invest in for-profit, you’ll probably want a quick run-down of the numbers associated with the schools. Let’s take a look at three of the largest schools in the space: DeVry, Apollo, and Strayer Education (NASDAQ: STRA). If for-profit education is at all investment worthy, one of these three will be where the money is.

<table> <tbody> <tr> <td> </td> <td><strong>DeVry</strong></td> <td><strong>Apollo Group</strong></td> <td><strong>Strayer</strong> <strong>Education</strong></td> </tr> <tr> <td>Market Cap </td> <td>$1.5B</td> <td>$2.3B </td> <td>$646M </td> </tr> <tr> <td>P/E Ratio </td> <td>13.71</td> <td>6.21 </td> <td>8.26 </td> </tr> <tr> <td>5YR EPS Growth % </td> <td>14.57% </td> <td>6.2% </td> <td>12.52%</td> </tr> <tr> <td>3YR EPS Growth %</td> <td>-10.33%</td> <td>-4.04%</td> <td>-1.41%</td> </tr> <tr> <td>5YR Sales Growth % </td> <td>17.58% </td> <td>8.76% </td> <td>14.85% </td> </tr> <tr> <td>Price/Book</td> <td>1.12</td> <td>2.24</td> <td>9.98</td> </tr> <tr> <td>ROI %</td> <td>8.5%</td> <td>36.9%</td> <td>55.3%</td> </tr> <tr> <td>Analyst Rating</td> <td>2.46</td> <td>2.63</td> <td>3.29</td> </tr> </tbody> </table>

So, you can see that the analysts are not fans, but these stocks do show some promising signals, especially if you look at them over the five year trend. Strayer has that incredibly high ROI that it's showing off, and it wasn't just a one time deal either--the five year average is 56.60%. All three were losing in the EPS over the three year time span and losing over the year in sales, and I can only expect this to grow as 2015 looms ever closer. 

Bottom line is to avoid these for-profit education stocks. If you want to jump into education, I'd recommend doing it elsewhere, definitely not the schools. I'm throwing my CAPS hat on and giving all three an underperform over the next five years! 

Ash1402 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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