Corinthian Colleges Inc (COCO), Capella Education Company (CPLA), Apollo Group Inc (APOL): Big Government Will Destroy Investors in For-Profit Education Stocks

The for-profit education industry is becoming a contrarian hotbed after the Department of Education’s initial round of rule-making for the industry was not as strict as many investors had anticipated. However, the companies’ reliance on Title IV funding is sure to sink them in the long run.

Paid by government, controlled by government

Title IV of the Higher Education Act of 1965 governs federal student financial aid. Students who receive Title IV funding, and institutions those students attend, must qualify for federal aid under the act. As a result, changes to the requirements may prompt some institutions to change in order to stay in compliance. This is de facto regulation of institutions that are heavily reliant on Title IV funding.

As it happens, for-profit education institutions derive the vast majority of their revenue from Title IV; it accounts for 85% to 95% of total revenue for Corinthian Colleges Inc (NASDAQ:COCO)Capella Education Company (NASDAQ:CPLA), and Apollo Group Inc (NASDAQ:APOL). Non-compliance would devastate these companies, which is why the federal government can require them to do just about anything it deems necessary.

The government’s intention to make stricter Title IV rules is not without reason; as with the government’s dubious loan program for sub-prime mortgages, its large exposure to highly indebted, jobless students to whom no private companies are willing to lend will inevitably lead to massive regulation so that the blame falls on the educational institutions instead of the politicians who encouraged the program.

Government regulation + industry competition = losses for shareholders

Being regulated out of existence is not the industry’s only concern; the growing popularity of internet-based courses is putting intense pressure on margins.

Only about 30% of students at Corinthian Colleges Inc (NASDAQ:COCO) take classes exclusively online, but Capella Education Company (NASDAQ:CPLA) is completely online. Corinthian Colleges Inc (NASDAQ:COCO) has been forced to close several campuses in an attempt to rebuild profitability, while Apollo Group Inc (NASDAQ:APOL)’s enrollment and margins have declined as a direct result of online competition. Even Capella Education Company (NASDAQ:CPLA), the leader in online degree programs, faces stiff competition from up-and-coming online rivals.

Although all three companies have unique brands and specialize in distinct niches (e.g., mid-career professionals), for-profit education is becoming a commodity product. No hint of prestige is attached to the degrees offered by any of these institutions and there are many for-profit colleges that have high job placement rates. As a result, the companies ultimately compete on price, which will lead to lower margins over time.

Bottom line

The U.S. government should be concerned about the for-profit education industry’s abuse of Title IV loans; the industry is known for racking up student debt and churning out students who cannot possibly hope to pay back the loans. As a result, the government may eventually make it so difficult for institutions to qualify for the program that for-profit institutions will have to completely change the way they do business.

In addition, the commoditization of the product and the move online will shrink margins and lower returns on invested capital to normal levels. The result of government regulation and increasing competition will be a cyclical industry with low returns on capital. This is not an industry anyone should want to invest in.

The article Big Government Will Destroy Investors in For-Profit Education Stocks originally appeared on Fool.com and is written by Ted Cooper.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Bloodiest UFC Fights Ever Fought

Most Expensive Rum Brands in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!