Forget the Ivy League — today’s budget-conscious and time-conscious students are turning to the E-vy League, schools that operate primarily online or with a strong online element. However, education is a tricky endeavor to quantify, as any teacher could tell you. Let’s take a look at three companies with potential and vet their prospects for your portfolio.
A decent inroad to the Chinese economy
Unfortunately, New Oriental Education & Tech Grp (ADR) (NYSE:EDU) has run into some issues.
The Educational Testing Service sued New Oriental Education & Tech Grp (ADR) (NYSE:EDU) for plagiarizing past test questions for teaching purposes without obtaining consent. This resulted in a fine and may speak of a shady corporate culture at new Oriental that investors should be wary of. The Fool reported on this company in 2011, and the earnings appear to have caught up enough to drive the earnings multiple down to the 25 range. While not ideal, considering the massive demand for many Chinese stocks this could constitute a decent price. If you’re okay with the potential for more bad news if New Oriental Education & Tech Grp (ADR) (NYSE:EDU) tries to inflate its students’ acceptance rate by using past test questions again, this is a potentially decent buy.
Possibly the best educational deal there is
Strayer Education Inc (NASDAQ:STRA) is something of an underrated cash cow. In 2009, the company spent $1,300 per student for instruction, but spent $2,500 per student in its marketing efforts in the process of making $4,500 per student in profit. That sounds like a decent business model, considering how many people want to advance their careers and look to education to make that happen. More recently, Strayer’s margins are still a strong 10.8% trailing. The company is also a pretty good deal, trading at around 10 times its earnings.
Strayer Education Inc (NASDAQ:STRA) has taken a lot of flack for paying its executives many times what other educational institutions pay their presidents and other faculty. While the recession is over and more people will likely be taking their degrees to work, Strayer’s method of keeping costs down through having most of its students be online appears to be working well.
It is possible that administration cold crack down on Strayer Education Inc (NASDAQ:STRA)’s profit margins, considering how much student loan debt the average person takes on nowadays. The government might also eventually step in and investigate how well Strayer Education Inc (NASDAQ:STRA) works to help students get jobs, which is the ultimate pragmatic goal of most people’s educations. Despite the possibility of future inquiries, I would recommend you consider Strayer when you feel it’s trading for a decent price.
Another route into the Chinese economy
TAL Education Group (ADR) (NYSE:XRS) operates in China, like New Oriental Education & Tech Grp (ADR) (NYSE:EDU) does. Only instead of being the school itself, TAL Education Group (ADR) (NYSE:XRS) operates as a sort of cram school in anticipation of passing exams and obtaining certifications. This is a company churning out a 14.8% profit margin, so there’s plenty of money available for expansion. TAL even pays a 5% dividend, making it a potentially nice addition to an income portfolio. The company is also still producing solid growth, with more than $225 million in trailing twelve month revenue.
It is worth noting that TAL Education Group (ADR) (NYSE:XRS) has similarities to Kaplan, which is owned by and trades under the Washington Post, offering similar services to TAL. In this case, I believe the main comparison is between the US and Chinese economies and their near-term prospects. The US’s economy is more mature, which is allowing more Chinese students to find jobs than their American counterparts. However, I believe this is counter-balanced nicely by how much more income potential people have in the US. As well, Kaplan works in a relatively large number of countries, while TAL has yet to spread as far. Beyond such “macro” differences between the clients these companies serve, the difference from a stock perspective is that the Washington Post originated in 1947 and went public in 1971, giving it a more robust history to draw from.
If anything, TAL Education Group (ADR) (NYSE:XRS)’s most major problem is that aside from being a Chinese company and associating itself with the growing power of that economy, it’s kind of an unknown. Having only gone public in 2010, TAL is still fairly new and hasn’t shown whether it can live up to the expectations it’s set. Having a goal of becoming China’s first major unified tutoring company, there is a lot to work toward. I suggest looking into TAL Education Group (ADR) (NYSE:XRS) because its numbers look good and its prospects look even better. This has a strong chance of being a diamond in the rough.
The Foolish bottom line
The private educational sector has a lot of choices. You could almost build your own mini mutual fund out of the K-12 set (New Oriental Education & Tech Grp (ADR) (NYSE:EDU)), tutoring (TAL) and college (Strayer Education Inc (NASDAQ:STRA)). And both growth and income are there. So take a closer look at these companies and choose a moment when your preference seems like a good deal.
Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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