Are There Profits To Be Made With For-Profit Education Stocks?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the economy continues to struggle and find some stable footing, many industries are naturally suffering. Restaurants find that less people eat out when they’re worried about their next paycheck, and retailers have pretty much the same observations. So where is an investor and fellow Fool supposed to put some money to work that seems to have the potential to beat the general market indices? One recession-proof industry has recently been higher education.

The clamor for caps and gowns
As we saw in the last meltdown in the early 2000s -- remember the dot-com collapse? -- business actually picked up considerably for eductators. The higher unemployment went up, the more people felt that higher education would make them a better candidate for the next job opening.

Apollo Group, Career Education (NASDAQ: CECO), DeVry, and ITT Educational Services were just a few of the many companies in the space that scorched higher for a good period there, as record revenues and profits led them higher. Unfortunately, one would think with the financial meltdown starting in late 2008, the good times would have continued for these companies again -- but nothing could be further from the truth.

The federal government started to crack down on what they understandably saw as questionable student loan practices at best. The government has even been seriously considering withdrawing its massive subsidies from the for-profit education sector. As a result, all of these stocks have been hammered. When I looked deeper at two of them, I saw some nice Foolish value.

Cheers for Career Education
As previously stated, Career Education was one of the big winners a decade ago, with scorching profits and great prospects ahead of it. The company’s stock now, though, is a far cry from the $70 all-time high it reached back in 2004. It now sits approximately 95% lower, under $4 per share.

However, the company now looks well-priced for value investors. Its fantastic balance sheet has basically no debt, plus a net cash position exceeding $5.50 per share. That means the company is trading at less than 70% of its net cash, which would make even value legend and Motley Fool idol Benjamin Graham blush.

Operationally, Career has missed the last two quarters' analyst estimates, but it did greatly exceed those same estimates in the previous two quarters prior to that. With Career trading at a paltry 0.1 times sales, and 0.3 times book value, I see the market's negative sentiment more than priced into the stock.

Add in the potential for literally any good news to push the stock extremely higher (much like DeVry on Feb. 7), a strong possibility of an acquisition -- the largest shareholder, Blum Capital, owns more than 20% of it already -- and/or a resolution with the federal government, and I think Career Education is set to generate market-beating returns.

A Bridgepoint worth traversing
Bridgepoint Edcuation (NYSE: BPI) has only been public since 2009, but that doesn’t mean it has been spared the pain of others in the space. The company is now sitting basically where it was when it went public, down approximately 60% from the near $30 all-time high it reached in 2011.

Like Career Education, Bridgepoint has a pristine balance sheet, with no debt and just over $6 per share in net cash. That war chest equates to approximately 55% of its current $10.80 share price. The company’s earnings have also been choppy the past four quarters, but returns on equity have been stellar, exceeding 33%, while returns on assets have been fantastic, coming in over 21%.

Add in the fact that the company trades at an anemic 1 times enterprise value/EBITDA, and its fantastic insider ownership, with the well-respected Warburg Pincus owning well over 60% of the shares outstanding, and I think BPI will be a winner as well.

A degree of discernment
In conclusion, virtually all for-profit education stocks have been crushed and left for dead. That's great for a value investor like myself, since it typically leads to some nice bargains. With their stellar balance sheets, extremely low expecations, and fantastic insider ownership -- by owners that may very well take the rest of the company over at a nice premium -- I'm especially intrigued by Career Education and Bridgepoint Education.


Wiseinvestors has no position in any stocks mentioned. The Motley Fool recommends Bridgepoint Education. The Motley Fool owns shares of Bridgepoint 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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