But in this industry, value metrics aren’t as important as these companies’ ability to survive and thrive. It’s increasingly apparent there are some quality operators in this industry, along with some real duds. For example, Career Education Corp. (NASDAQ:CECO) has sharply sinking revenues, ongoing operating losses, legal headaches from regulators and a falling cash balance. This stock has rallied sharply recently because the worst-case scenarios haven’t panned out, but it’s unclear when this company will become profitable.
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| Can Career Education’s Le Cordon Bleu College of Culinary Arts help the company become profitable? |
It also may be tempting to focus on the stocks with the lowest P/E ratios in the industry. But both Apollo Group Inc (NASDAQ:APOL) and Corinthian Colleges Inc (NASDAQ:COCO) are suffering enrollment declines and are being heavily scrutinized by regulators. Those two are simply too risky to own right now.
In contrast, Grand Canyon Education Inc (NYSE:LOPE) appears to have struck a winning formula, with operating margins approaching the mid-20s. The school has struck a balance between cost management and educational value, which also explains why enrollment is growing at a 15% annual pace.
Students can attend classes on campus (in Arizona) or at home. More than 80% of students are enrolled online, but the option to mix and match holds great appeal to some students as their lifestyle and financial pictures change.
Grand Canyon Education Inc (NYSE:LOPE) “is focusing on improving quality, while leveraging its ground campus and benefiting from a differentiated marketing strategy,” noted Merrill Lynch analysts, who rate the stock a “buy” with a $40 price target. The campus-based part of the strategy should get a boost when a second 15,000-student campus opens in the Phoenix area in 2015.
Risks to Consider: Though this industry has avoided fatal levels of congressional scrutiny thus far, these companies aren’t out of the woods just yet. It’s wisest to stick with higher-quality operators such as Grand Canyon Education, which appear to be in much better standing with regulators thanks to its superior education outcomes and lower student loan default rates.
Action to Take –> In addition to Grand Canyon Education Inc (NYSE:LOPE), there are signs of improvement at DeVry Inc. (NYSE:DV) and ITT Educational Services, Inc. (NYSE:ESI). Both stocks are worthy of further research.
– David Sterman
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