For-Profit Education Sector's Dunce Cap

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An Opportunity for Bargain Hunters?

Apollo Group (NASDAQ: APOL) headed for the teachers' lounge after being smoked by future expectations.  Even though the company beat estimated earnings and revenue for the quarter, it produced a failing grade for its outlook on full-year revenue guidance. Hearing the recess bell, investors in the for-profit education sector found yet another reason to head for the school yard exits.

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Declining Enrollment and Low Graduation Rates

The company, already down by more than 60 percent over the past year, fell further on the news that enrollment at the University of Phoenix, wholly owned by Apollo, dropped 14 percent in its fiscal first quarter.  New student sign-ups, a leading indicator of demand for on-line education, fell 15 percent, a number that topped the past three month's declining admissions.  This is in addition to a steady stream of negative headlines about high defaults, low graduation rates, and questionable recruiting tactics.

Apollo Group’s response was faster than a scalpel dissecting frogs in a biology lab.  The company announced that The University of Phoenix is closing 115 of its brick-and-mortar locations and reducing its work force by close to 5%.

Bargains or Detention Candidates?

Companies like Capella Education (NASDAQ: CPLA) and Strayer Education (NASDAQ: STRA) quickly fell out of favor because they share the same model as Apollo, and are subject to the same increasing competition from regular colleges that are developing their own on-line programs or program blends.

The most obvious question is whether or not this might be an opportunity for bargain hunters.  The answer is a resounding no.  Many of these for-profit institutions need to overcome the negative cost vs. benefit stigma plaguing current and future students.  Discounting tuition is one way to overcome the bad vibes, but it also cuts into revenue forecasts.  The ominous shadow brought on by pending accreditation issues isn’t helping matters either.

Still, these for-profit schools get an A for marketing, spending lots of lunch money on advertising to stay in front of the next generation of high school graduates.  Fierce cost cutting could keep them in the black.  Committing to full time, just on-line, could be another much needed response.

Top Students in Strong Niches

There may be one or two "head of the class" companies offering an investment opportunity.  One of these companies, Grand Canyon Education (NASDAQ: LOPE), has managed to keep fixed costs low while increasing enrollment bases, but tuition revenue is lower and there are no signs that it can be raised anytime soon.

Grand Canyon’s enrollment has increased almost 60% in the past three years with a combination of brick-and-mortar and online operations.  It is also considered a niche school because it has a strong following from the Christian sect.  Measuring the value of this advantage is no easy task.  The information provided by other brick and mortar Christian schools with active alumni and similar programs is not easily obtainable.

If you feel the need to go back to school, enter with caution.  Better still, graduate to other sectors to invest in.

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