1) Improving Employment: The unemployment rate is still higher than it was before the financial crisis, but has been steadily dropping. For the month of April, the national unemployment rate hit 7.5 which was below expectations, and economists believe that May was a strong month for hiring as well.
As employment rates rise, the case for higher education becomes stronger. Prospective students believe that they will have a shot at getting hired after school and become more willing to make the financial and time commitment of pursuing a bachelor degree or masters degree.
With the broad economy gradually mending, enrollment rates should begin to recover over the next several quarters.
2) Student Loan Availability: There has been talk of cuts to federal student loan programs. This would be disastrous for education companies because they rely on federal loan programs.
But a recent report from the Congressional Budget Office shows a significant surplus of funds for 2013, which means that the Pell Grant program should not be affected by budget cuts in the near future.
A stronger economic environment, coupled with an accommodating Federal student loan program, should cause the for-profit education stocks to trade higher over the next 12 to 18 months.
Three rebound candidates
Today, I want you to consider adding these three education stocks to your portfolio.
As is the case with most turnaround investments, the stocks are not perfect. All three of these stocks are trading below their previous price points because of significant challenges. But as the market turns higher, these three stocks should give investors a great shot at doubling their investment over the next few quarters.
Apollo Group Inc (NASDAQ: APOL): Apollo Group Inc (NASDAQ: APOL) is currently trading near $20, while analysts expect the company to earn $2.73 per share this year (fiscal year end is August 31), and $2.21 per share in the coming year.
The company has made some very painful (but necessary) restructuring decisions over the past year. In October, Apollo Group Inc (NASDAQ: APOL) announced that it would close 115 physical campuses and lay off 4.7% of its University of Phoenix employees.
On May 14, Apollo Group Inc (NASDAQ: APOL) received a letter from the HLC Institutional Actions Counsel, stating that the company would continue to be an accredited university for another 10 years. This positive announcement helps clear the way for stronger enrollment and better employment prospects for future graduates.
I look forward to the company’s next quarterly report, which should incorporate new expectations based on this positive news.
Apollo Group Inc (NASDAQ: APOL) is currently trading at a single digit multiple, in an environment that is becoming much more conducive to growth. I expect analyst estimates to increase over the next several quarters, which should result in a higher PE multiple for the stock.
ITT Educational Services, Inc. (NYSE: ESI): ITT Educational Services, Inc. (NYSE: ESI) is also trading with a single-digit Price / Earnings multiple as investors are skeptical of the industry. The stock trades at $23.97 with analysts expecting $3.94 in earnings per share this year, and $2.49 for 2014.
Similar to Apollo Group, management is working hard to trim excess and get back to a strong core business platform. In the last quarterly report, the company noted a 3.6% decrease in new student enrollment, along with a significant decrease in debt and net capital expenditures.
ITT Educational Services is actively buying back its own stock, which should help to boost profits per share in the coming quarters. Over the past four years, the number of shares outstanding has declined 35%. This means that in time as the for-profit education industry rebounds, net income will be spread across a fewer number of shares, likely beating analyst expectations and sending the stock price higher.
