For-Profit Ed: Forget Cramer's "Bad Neighborhood"
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last March, Jim Cramer described the for-profit education sector as a "bad neighborhood" investors shouldn't be in. That aggregate kind of thinking is useful for index investing such as through the Bloomberg U.S. For Profit Education Companies Index. That has been at $297+, with a 52 week range of $272.57 to $571.38. No, for-profit ed isn't doing so hot.
But many other investors focus on particular companies. And when it comes to particular companies the big picture about the so-called sector counts less and less. LinkedIn's value has so little to do with what other players like Facebook in the social media network space are doing or not doing. In this dog fight of a global marketplace disrupted by technology, it's every company for itself.
Actually, it's difficult to think about any so-called sector which can be considered a monolith, at least not any more. There are only individual companies with their idiosyncratic strengths and weaknesses. The concept "sector" could be as much an anachronism as that 1970s phrase "Corporate America." At best, it might serve as a shorthand way of referring to companies whose lines of business are somewhat similar. But, that quick/easy kind of summing up probably isn't telling us much, is it?
So, let's leave the notion of neighborhood or monolith and look at some separate companies in for-profit. Sure, there are common clouds hanging over all of them. The most recent is the HELP Senate Report which presents unfavorable comparisons between for-profit and non-profit on metrics ranging from the cost of tuition to percentage of loan repayment. Regarding the latter, the feds have begun docking Social Security checks up to 15% to collect on overdue loans. Most for-profits spend way too much on marketing with high new-student acquisition costs. And the recession and slow recovery have left seats empty. That drop in enrollments is atypical for downturns. Usually the unemployed wait out recessions in school. What's happening is a questioning of the supposed positive correlation between academic degrees and professional mobility - or even the ability to get a job. But the reality is, to paraphrase Tolstoy's observation about unhappy families, each company will have to deal with these public relations, operational, and marketplace challenges in its own way.
For many investors what’s productive is to look at companies in for-profit on an individual basis. How to do that? That depends on how investors believe current value and future prospects can be assessed.
One way is through fundamental analysis, such as The Motley Fool presented on August 9th for Apollo (NASDAQ: APOL). The score was a low 39%. There were many failing grades, with the few passing ones for profit margin, insider holdings, cash flow from operations, average shares outstanding, and income tax percentage. The one neutral was for R&D as a percentage of sales. For those who swear by fundamentals, these metrics can be important in themselves. They can also factor into the algorithms created for computer trading.
According to other Motley Fool fundamental run-downs, such as presented on August 1st by John Del Vecchio, DeVry (NYSE: DV) is a “don’t buy.” The reasons why include a revenue decline of 3.9% based on rising costs, a decline of operating cash from $211.3 million to $135.83 million, and a revised downward Q4 revenue outlook. On the other hand, Del Vecchio assigns a “wait and see” for American Public Education (NASDAQ: APEI) where revenues are expected to keep increasing and margin erosion to slow.
Company Operational/Branding Strengths
Another approach to analysis is to deconstruct operational and branding strengths, ranging from a respected business model and growth strategies to the presence of star players and brand-name aura. Of course, there can be a blending of both aspects from fundamentals and from this approach.
Grand Canyon Education (NASDAQ: LOPE) is solid in its operations. Also, it has been hailed for its strong brand identity as a Christian institution. That differentiates it from for-profit competitors and also allows it to compete with Christian non-profit colleges. In addition, it has been able to create a presence as a brick and mortar campus, along with its online instruction. This branding is so important because way back in 2006, German marketing genius Manfred Brhun pointed out in his book "Guide to Integrated Communications" that the new way of competition in an era of commodities is not among companies' products and services but in how those are marketed. "Apple v Samsung" is showing how similar products can be and how clever Apple has been in marketing. Grand Canyon's stock is at $20+, near a 52-week high of $21.87 with a low of $14.12.
On the other hand, Strayer (NASDAQ: STRA) is getting the knock in some circles for, among other factors, executive compensation. Its chief executive officer Robert S. Silberman has been paid $43 million from 2009 to 2011. During that time the stock price went from $253 to the current $70+. The business model certainly isn't based on cost efficiency. In addition, just as with non-profit universities, high administrative salaries can tarnish the brand.
Also some are scratching their heads why its in-house Welch Management Institute has no big names associated with it, except perhaps for the former GE CEO Jack Welch who had founded it. The fact that Welch is retired reduces star power. On the other hand, some attribute much promise to the developing for-profit Minerva University (which still needs to be accredited) because major players with current establishment jobs such as Harvard economist Larry Summers are involved. Twinkle twinkle little star is as required in academia, for-profit and non-profit, as it is in sports and entertainment.
Yet another branding matter associated with the Institute itself is why it isn't housed in a foundation, think tank, or elite non-profit academic institution instead of a for-profit. Therefore the elephant in the room is: Does the Institute's presence hurt or help Strayer? Incidentally, the Institute's first home was for-profit Chancellor University. One wonders if Strayer had given enough thought to the unique space or "blue ocean" it should have created for itself.
Turnarounds = Inside Job
Education, for-profit as well as non-profit, just like so many other so-called sectors, is in the midst of upheaval. Not all organizations will be left standing. By focusing on the individual ones and studying their unique strengths and weaknesses, investors can develop insights about where to put their money and where not to and if to bail out. While it’s intellectually stimulating to contemplate the big picture, there seems to be small or no financial payoff. How Facebook fixes itself, especially its business model, will be primarily an inside job.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of American Public Education. Motley Fool newsletter services recommend American Public 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.