Beat Student Loan Debt with These 3 Education Stocks

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Are we coming out of a bubble in for-profit education? Though many students benefit from these institutions, there are many who emerge from them saddled with debt and without jobs.

The growth of for-profit colleges has been rapid and is not sustainable. Enrollment has dropped, and many stock prices are dropping with it. In such a challenging environment investors must demand low valuations for investments.

Mounting Student Loan Debt

Rising tuition and a persistently tough job market have led to an increase in the student loan debt among senior college graduates. A study by the Institute for College Access and Success revealed that the average college student with student loans owed $26,600; yet 37.8% of employed graduates are working in a job that does not need a college degree. The study indicates that average varies from state to state, with the largest concentrated in the Northeast.

The study also highlighted that the gap is widening between increasing college costs and the ability of parents to pay. Students who enrolled in college in 2011 were pressured to borrow more for education by state budget cuts and fee increases. An increase in federal financial aid and the cost of living have also contributed to the mounting debt burden.

The economic value of college was once sacrosanct, but is now often discussed in the media. To be fair, these discussions must be tempered by higher unemployment rates for high school graduates. In 2011, the unemployment rate for college graduates was 8.8%, and 19.1% for high school grads. This indicates that the unemployment rate among students is more than twice that of college graduates.

Enrollment Down

Apollo Group (NASDAQ: APOL) fell after it lowered revenue guidance for fiscal 2013. Apollo is the parent of the University of Phoenix colleges and the largest for-profit college in the U.S. Its guidance was projected to be between $3.65 billion to $3.8 billion for Apollo’s fiscal year-end in August 2013. This is substantially lower than the $4.07 billion average of prevailing analyst revenue estimates. This plunge was extrapolated from a 14% decline in University of Phoenix student enrollment.

In response, the University of Phoenix intends to cut costs by closing 25 campuses and 90 learning centers, actions that will impact four percent, or 13,000, of its students enrolled in degree programs. These cuts encompass 800 positions nationwide and are expected to save $300 million.

Alex Clark, a spokesman for Apollo, said, “These eliminations will happen over the course of the coming year, as it will take some time to phase out these campuses and learning centers.”

Unlike many organizations, the University of Phoenix system is ready to make good on its downsizing plan. Apollo’s learning centers are sometimes little more than auxiliary classrooms and extensions of its campus network. Many of its staff work part-time as contractors and can easily have their hours or course offerings cut. Moreover, many students have options in dealing with reduced class offerings. Many of the students who will lose access to physical classrooms will either supplement or replace their course load with online courses.

Wells Fargo Securities senior analyst Trace Urdan concluded, “The net result is that our fiscal year 2013 earnings per share estimate moves to $3.05 from $3.45 and our FY 2014 estimate moves to $3.19 from $3.84. Our valuation range moves comparably lower to $35-39 from $37-41.” His analysis revealed that these cuts would be an appropriate response to declining enrollment.

In all fairness, this reduced forecast does not justify the market’s 61% year-to-date decline for Apollo shares.

Searching for Value

Peter Appert, an analyst for Piper Jaffray, cautioned, “Education stocks are value traps, burdened by a downward bias in estimates, limited enrollment visibility and increasingly intense competitive dynamics.”

Investors must carefully weigh the investment metrics of different firms in this space:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> <td> <p><strong>P/FCF</strong></p> </td> <td> <p><strong>Long-Term D/E</strong></p> </td> </tr> <tr> <td> <p>APOL</p> </td> <td> <p>Apollo Group</p> </td> <td> <p>7.02</p> </td> <td> <p>0.56</p> </td> <td> <p>2.56</p> </td> <td> <p>5.46</p> </td> <td> <p>0.78</p> </td> </tr> <tr> <td> <p>BPI</p> </td> <td> <p>Bridgepoint Education</p> </td> <td> <p>3.76</p> </td> <td> <p>0.54</p> </td> <td> <p>1.16</p> </td> <td> <p>3.61</p> </td> <td> <p>0</p> </td> </tr> <tr> <td> <p>DV</p> </td> <td> <p>DeVry</p> </td> <td> <p>15.49</p> </td> <td> <p>0.83</p> </td> <td> <p>1.25</p> </td> <td> <p>15.07</p> </td> <td> <p>0</p> </td> </tr> <tr> <td> <p>ESI</p> </td> <td> <p>ITT Educational Services</p> </td> <td> <p>2.31</p> </td> <td> <p>0.36</p> </td> <td> <p>3.7</p> </td> <td> <p>5.3</p> </td> <td> <p>1.06</p> </td> </tr> <tr> <td> <p>LOPE</p> </td> <td> <p>Grand Canyon Education</p> </td> <td> <p>16.97</p> </td> <td> <p>2.21</p> </td> <td> <p>4.95</p> </td> <td> <p>16.96</p> </td> <td> <p>0.13</p> </td> </tr> <tr> <td> <p>LRN</p> </td> <td> <p>K12</p> </td> <td> <p>46.04</p> </td> <td> <p>1.08</p> </td> <td> <p>1.6</p> </td> <td> <p>-</p> </td> <td> <p>0.07</p> </td> </tr> <tr> <td> <p>STRA</p> </td> <td> <p>Strayer Education</p> </td> <td> <p>8.12</p> </td> <td> <p>1.22</p> </td> <td> <p>10.35</p> </td> <td> <p>21.63</p> </td> <td> <p>1.44</p> </td> </tr> </tbody> </table>

Many of these stocks are trading at valuations that are appropriate for a distressed industry. Apollo Group, Bridgepoint Education (NYSE: BPI), and ITT Educational Services (NYSE: ESI) are all trading at low price multiples. They are earning a profit, generate positive free cash flows, and are partially financed by manageable levels of long-term debt. Value investors should consider placing small investments in these firms, since the industry as a whole is likely to survive. It will be tumultuous, with downsizing and possible liquidations, but there is a need for colleges like these to help many high school graduates enter the workforce.

Other firms on this list do not offer sufficient bargains to justify jumping into a horrible industry. Grand Canyon Education (NASDAQ: LOPE), DeVry (NYSE: DV), and K12 have unacceptable price-to-earnings multiples and must be true bargains given the industry’s problems. Grand Canyon Education and Strayer Education have a price-to-book ratios that are ridiculously high. This could be a problem, since the assets of these firms would not be worth much upon liquidation since buyers would be primarily other for-profit schools. Strayer Education is also unattractive based on its long-term debt load.

Conclusion

Since the industry will be rocky for years, investors should demand bargain valuations. Fortunately, three stocks appear attractive based on their current prices. Apollo, ITT Educational Services, and Bridgepoint Education are trading at low enough prices to constitute bargains. Investors should only consider them for tiny speculative positions.

In contrast, the other names in this industry are not trading at sufficient discounts to justify making a speculative bet.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bridgepoint Education. Motley Fool newsletter services recommend Bridgepoint Education. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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