Grand Canyon Education Inc (LOPE), Apollo Group Inc (APOL): Should You Dip a Toe in the Education Sector?

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According to the National Center for Education Statistics, a record 21.6 million students attended U.S. colleges and universities in 2012, up 40% from 2000. With relatively inelastic demand, seemingly bottomless government funding, and a limited supply of schools, the sector seems to have favorable investment characteristics. Indeed, the industry’s favorable economics led to fast growth for the for-profit education providers, until government investigations into programs and recruiting methods put a clamp on the industry’s growth. So, how can an investor play the sector?

Apollo Group Inc (NASDAQ:APOL)

Owning a university

While you probably can’t own shares of your alma mater, you can own Grand Canyon Education Inc (NASDAQ:LOPE), owner of Grand Canyon Education Inc (NASDAQ:LOPE) University and a major player in the online and distance learning segment with roughly 44,000 students. While 85% of its students are in its online programs, the company has grown the student population on its Arizona-based campus to 7,600 students, with a strong value proposition versus the state’s public institutions. Grand Canyon Education Inc (NASDAQ:LOPE) University is also looking more and more like a traditional university, with a goal to grow its campus-based population to 12,000 students by the 2015/2016 school year.

In its latest fiscal year, Grand Canyon Education Inc (NASDAQ:LOPE) Education reported strong financial results, with increases in revenue and adjusted operating income of 19.8% and 39.3%, respectively, versus the prior year. Its sales growth benefited from a 19% increase in its overall student population, as well as a small increase in its tuition rates. More importantly, the company generated higher profitability as it leveraged its administrative structure, allowing it to reinvest in additional classrooms and technology capabilities.

Of course, the wildcard in the industry is Uncle Sam, who is both the primary regulator and the ultimate source of funds through its financial aid programs. The federal government pays the lion’s share of tuition costs at most schools, 80.3% in Grand Canyon Education Inc (NASDAQ:LOPE)’s case, which gives it the ability to determine an organization’s success or failure. It also requires accreditation from a nationally recognized education authority for an organization to receive federal financial aid funding.

A cautionary tale

Grand Canyon Education Inc (NASDAQ:LOPE) Education needs to be vigilant against the dangers of growing too fast, which can raise red flags with education regulators who are concerned with value received for federal education dollars. A case in point is Apollo Group Inc (NASDAQ:APOL) and its University of Phoenix operation that grew into one of the world’s largest educational institutions over the past 40 years, with over 300,000 enrolled students as of December 2012.

Its predominantly online platform allowed it to reach multiples of more students than a traditional university, especially among its working adult demographic. However, the company’s growth has dissipated over the past couple of years as it has had to change recruiting practices and traditional university competitors have moved into the online learning segment.

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