For-profit education stocks have suffered mightily over the past year on widespread concerns. At the heart of it is an ongoing concern over the very economic viability of the industry itself. Dropping enrollments and falling profits are accelerating, forming a snowball effect of sorts that has brought the entire sector to its knees.
More recently though, industry components including Apollo Group Inc (NASDAQ:APOL), Bridgepoint Education Inc (NYSE:BPI), and Strayer Education Inc (NASDAQ:STRA) have actually rallied considerably off their recent lows. And, further excitement ensued when it circulated through the financial media that famed investor Dan Loeb may have taken a stake in Apollo Group Inc (NASDAQ:APOL), the embattled educator, which sent stock of the embattled educator up as much as 7% intra-day.
Unfortunately, it quickly became known that Loeb’s Third Point fund did not, in fact, make an investment in Apollo Group Inc (NASDAQ:APOL). Investors buying on the heels of this rumor are making a big mistake, and would be wise to avoid the sector entirely.
A dead-cat bounce by any other name…
…..is still a dead cat bounce. This is an investing adage that refers to fundamentally-damaged companies which see brief rallies in stock price. That’s my impression after seeing for-profit education stocks climb in recent months. There’s long been a bull case in place that these stocks are cheap, and based on their current valuations, they do seem inexpensive.
After all, Apollo Group Inc (NASDAQ:APOL) and Bridgepoint Education Inc (NYSE:BPI) trade for just 7 times trailing earnings, and Strayer Education Inc (NASDAQ:STRA) is only slightly more expensive at 9 times trailing earnings. These multiples certainly look compelling in light of that fact that the S&P 500 trades for an earnings multiple in the high teens.
Investors need to remember, though, that historical valuations are just a snap-shot in time. They don’t take into account the likely growth (or decline) of EPS going forward.
That’s why these for-profit education stocks are actually more expensive than they seem. Quite simply, earnings across the industry are collapsing, and that process hasn’t exhausted itself by any means.
Consider the recent developments from these companies, and ask yourself whether the trend is positive or negative.
Apollo Group Inc (NASDAQ:APOL) said its third-quarter profit fell a whopping 40% from the prior year on a 16% drop in revenue year over year. In the same quarter, Apollo’s University of Phoenix saw total enrollment fall 17%, and new student sign-ups fell a massive 25%.
Strayer Education Inc (NASDAQ:STRA)’s first-quarter results saw revenue and diluted earnings per share fall 8% and 24%, respectively. Furthermore, Strayer Education Inc (NASDAQ:STRA)’s total enrollment dropped 9% and its new student enrollments decreased 14%.