Which For-Profit Education Institutions to Buy?

Anh 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 institutions have suffered substantially in the market these days. Even famous short-seller Jim Chanos commented that the for-profit education model was broken, as it relied heavily on the government funding, which was taxpayers’ money. However, when any stock is beaten down so badly my interest rises, as the price might be too cheap compared to the problems the business is facing. In addition, some for-profit educational institutions have been generating significant cash flow on the franchise it has built. So which institutions should you pick if you are interested in putting some money in this industry?

The for-profit education business used to be quite easy, with abundant federal loans for students. Things changed when the Education Department modified the rules, shifting more responsibilities onto the institutions themselves. Arne Duncan, the US Secretary of Education, commented: “Career colleges have a responsibility to prepare people for jobs at a price they can afford. Schools that cannot meet these very reasonable standards are on notice: invest in your students’ success, or taxpayers can no longer invest in you.”  So some programs might not meet the funding standard. However, those for-profit colleges still have time to improve their operations until the 2015 deadline, when they lose funding from the government.

Several for-profit education institutions are worth looking deeper into, including Apollo Group (NASDAQ: APOL), Corinthian Colleges (NASDAQ: COCO), DeVry (NYSE: DV), and Strayer Education (NASDAQ: STRA). Year-to-date, those stocks have beaten down heavily.

Apollo is the worst performer since the beginning of the year, with a more than 62% decline in its stock price; whereas Corinthian is the best performer, with only nearly a 2% loss year-to-date. DeVry and Strayer have been declining substantially as well, at losses of 31% and 40%, respectively.

However, those institutions have generated consistent free cash flow over time. 

Apollo, the worst stock performer, has been generating the highest amount of free cash flow, with a current TTM FCF of $436 million. Strayer is producing the least, at nearly $58.6 million. As we can see, the two companies with the most free cash flow fluctuation are Apollo and Corinthian.

In terms of the return on equity over the past 5 years, Strayer turns out to be the winner among the four. It currently delivered nearly 138% ROE for its shareholders. Apollo ranks the second, with nearly 39% ROE. DeVry only returned 8.5% on equity, and the lowest ROE belongs to Corinthian, with only 0.8% ROE. 

In order to be eligible for federal funding, those institutions need to focus on making operations more efficient, reducing costs, and default rates by only admitting quality students. In October, Apollo mentioned that it would close around 25 campuses and cut 800 jobs to reduce costs by $300 million in fiscal 2014. DeVry, which seems to be the stronger institution because of its technology, healthcare, and business courses, said it would cut costs by eliminating 570 jobs. Corinthian has made its move by stopping enrolling non-high school graduates with ATB (ability to benefit), as these students have a high probability of default on their loans. ATB students accounted for around 15% of Corinthian’s admissions. For Strayer, it has been growing significantly in the last 10 years to 50,000 students in around 100 campuses with the core programs of accounting, business, and information technology. In the third quarter, Strayer offered a new scholarship with a 30% discount for qualifying students to bring more students to its door to compete with nonprofit colleges. 

In terms of valuation, Strayer is valued at 10.5x forward P/E, while it is paying a hefty dividend yield of 7%. DeVry is next, with a 1.2% yield and 9.7x forward earnings. While Apollo is not paying a dividend currently, it is valued cheaper at 6.5x forward earnings. Corinthian is the cheapest, with only 4.1x forward P/E.

Foolish Bottom Line

Personally, I am more with Strayer and Apollo because of their highest returns on equity. Strayer has a superior franchise compared to the others, along with its good core educational programs. Apollo is currently concentrating on cutting costs and selectively admitting only high quality students. The painful past performance of its shares will cost investors much less to invest in the business, which is “restructuring” for more efficient operation. 

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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