For-profit Education: Forget Bubble Talk
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The excitement isn't only in hospital stocks after the U.S. Supreme Court ruled Obamacare constitutional. Analysts and shareholders are again looking at the distressed for-profit education sector. They're sorting what could make this category bounce back after being so down since 2010. As a result, some of the stocks are up. Among them are Apollo (NASDAQ: APOL), Grand Canyon Education (NASDAQ: LOPE), and Strayer (NASDAQ: STRA).
Reduced Regulatory Uncertainty
Part of what has triggered the interest in the sector is that 95% of it passed the Education Department’s three performance requirements which are part of a new gainful employment regulation. That in itself solves myriad problems. One, it reassures investors that the sector won’t lose its ability to tap into federal funds for student aid, at least not yet. Two, it significantly reduces regulatory uncertainty. And, three, it neutralizes the fallout from the Center for Analysis of Post Secondary Education and Employment (CAPSEE) study about for-profit graduates’ higher rate of loan default and lower employment as compared to those of nonprofit graduates.
No Bubble, No Bust
Another positive sign is that it's turning out that education, both for-profit and nonprofit, doesn't seem to be a "bubble," after all. After the collapse of the dotcoms and then real estate, some influencers such as Antony Davies and James R. Harrigan have been busy identifying the dynamics of education as a bubble. When it does burst, they warn, the ramifications will be worse than the fallout from housing. The funny thing is that the educational sector, both for-profit and nonprofit, continues on, with shifts but so sign of collapse.
Think about it. Although the American Bar Association reported that 45% of the Class of 2011 did not obtain full time long term jobs which required a law degree, the Law School Admission Council found that applicants to law school are only down 15.6%. That means 84.4% of those who would usually have applied to law school are still doing so. Law schools are usually a nonprofit university’s cash cow and it’s still delivering lots of milk. The other 15.6% could be shifting to other kinds of advanced degree programs such as in business, public health, or information resources, at a nonprofit or a for-profit. No surprise, graduate enrollments are up at Strayer. The current reality in the U.S. as well as many other economies, developed and undeveloped, is that higher education is valued as a necessary tool for professional success and creating wealth, individual and national. The growth of unemployed educated around the world seemingly hasn’t diluted the value of degrees. Most of the for-profits have expanded abroad, where the growth rate is higher than in the U.S.
Brand Differentiation
However, challenges remain for the industry. Apollo’s stock at $35.59 is still near the 52 week low $30.93 and far from the high of $58.29. For Q3, it beat earnings consensus by 23 cents but the $1.20 per share was 8.5% lower than Q3 in 2011. The problem is the drop in enrollments for the Associate and Master Degree programs. Here there is stiff competition from nonprofits, especially community colleges and state universities which often charge less. Both nonprofit entities are beginning to communicate how they prepare students for well-paying careers. Also, like most of the for-profit sector, Apollo has no clear brand differentiation. The sector can learn from member Grand Canyon.
Grand Canyon’s stock at $20.05 is near its 52 week high of $20.20 and far from the low of $13.71. This institution operates both online and via campus instruction throughout the U.S.and Canada. However, it is known as an Arizona-based Christian university. That resonates enough to constitute strong branding. In addition, it has created niches such as education for entrepreneurs. FORTUNE SMALL BUSINESS recognized that program as one of the top online schools for that category.
Strayer is paying attention to branding. In his Q1 earnings call, its chief executive officer Robert S. Silberman made explicit his goal of differentiating his institution from the competition. An example he cited was the Jack Welch Management Institute based there which is positioned as providing corporate training. That sets it apart from the usual both for-profit graduate business management programs. A Welch Institute option is a six week Executive Certificate program whose tuition is $2,400. If Strayer positions and packages that right, it could make it a standard offering for corporations as Dale Carnegie Systems training had once been. On that platform it could build branding for managerial development.
Although Silberman didn’t mention it, he could also decide to emphasize graduate degrees. While undergraduate enrollments have been declining at Strayer, those in graduate ones were up 12% for the spring and consistently for three quarters. On the other hand, Apollo might emphasize bachelor degrees.
No Civilizing Mission
As analysts and investors know, the glow came off for-profit around 2010, beginning with the scandal about its alleged recruiting practices. Before that THE ECONOMIST had been among those saluting this new category as one of the most successful businesses of the 20th century. After that success and distress, it now has a shot of reclaiming its place as the no-nonsense institution for career preparation. Nonprofit, of course, has recognized the need to address its consumers’ concerns about the correlation between the degree and the quality of the job. The edge for-profit is that it never, like nonprofit, put out a mission to educate the whole human being. Moreover, it doesn't have to create a career mindset among its instructors and staff. Change happens very slowly in traditional academia and it could be years before institutions get onboard with educating primarily for jobs.
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