Can You Profit From For-Profit Education?

By T. M. Loyd - September 20, 2012 | Tickers: APOL, DV, ESI | 0 Comments

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For-profit education wallows in 52-week lows, but yesterday’s losers are tomorrow’s winners, and these stocks bear fundamental examination yet again; as a former public educator I have no great love for this industry, but the shockwaves the industry has suffered due to government attempts at regulation this year have piqued my curiosity. So crack open your books (e.g. SEC filings) and pull up a desk.

Even as the market continues its upward trend, DeVry (NYSE: DV) continues to hover just above a 2-year low. Has the national purveyor of private and profitable post-secondary pedagogy really lost more than half its value as a company or is there more to this company than speculators know?

First, let’s acknowledge the glaring fact that DeVry reported a 25% drop in net income YOY; the year before that even brought in more cash than the latest statement. This is compounded by the trailing earnings in the last four quarters, with Q3 net income underperforming the past three quarters by an average of 35%, in part due to increasing expenses despite the underwhelming sales.

But education isn’t about the present, it’s about the future, and how you’re going to take advantage of it. Investing, intelligent investing, is much the same. While its profits dance back and forth, DeVry is currently trading very near to its book value with a Price-to-Book of 1.1, and the book value per share is inching up on the share price at $20.80. In other words, DeVry can be bought with the knowledge that the current asking price is at least secured by its assets ($1.8 billion).

Finally, the company finds itself without either long term or short term debt. What this translates to is a business that already has a strong position in the industry, with access to cash, and a relatively low price supported by the company’s considerable assets. As it stands, the PEG ratio sits around 1, suggesting that DeVry is priced fairly; considering its dividend yield below 1.5%, holding onto the stock isn’t particularly vital. Waiting and watching as DeVry’s price falls below its asset value and it is further devalued may be the wisest course of action here, but it may not be a bad buy soon. I leave that decision to you, dear reader.

Of course, the dividend on ITT Educational Services (NYSE: ESI) is even less appealing at a whopping 0%, along with a declining cash flow. On the other hand, it’s trading below market value with a PEG ratio of 0.69 – not low enough for this Fool, and one wonders what genuine growth can be expected of a business already in a struggling industry. ITT may be worth a second look if it can get its income straightened out…

And finally we come to the playground bully and the butt of all for-profit education jokes, Apollo Group (NASDAQ: APOL), better known to your computer’s spyware detection software as the University of Phoenix. Apollo appears ripe for growth with a PEG of 0.17 and YOY increasing income (a modest 3%) matched with a decrease in receivables.

A decrease in assets and the accrual of yet more debt sounds a note of caution in this assessment, however. Apollo is walking a fine line, but the market’s skittish valuation of the stock may have produced a good bargain. Pay attention to these companies’ fundamentals, and note positive changes even when their stock prices don’t; in the long-term, should for-profit education find itself more heavily regulated, it is unwise to presume that stricter government standards for the sector won’t necessarily create ultimately better businesses. You can’t have any pudding if you don’t eat your meat, after all.

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