The most profitable investment opportunities are found in industries that are perceived to be high risk. One example is the for-profit education sector which has suffered from issues relating to low enrollment rates and regulatory risks. I like
Strayer Education Inc (NASDAQ:STRA), a for-profit, post-secondary education services provider, for the way it has tackled issues like affordability and low graduation rates head on, with the aim of improving enrollment rates. Its regulatory risks are also manageable, as its cohort default rates are well below the national average. However, its peers
The value of education and tackling issue of low enrollment
For most graduates, education helps them secure better, higher paying jobs. This importance of a Bachelor’s degree in improving your financial status becomes more relevant in today’s context. According to data from the Bureau of Labor Statistics, the disparity in compensation between an average Bachelor’s Degree holder and an average High School Diploma holder has widened from about 30% to 80% in the past three decades.
Affordability and low graduation rates are two major reasons why some students choose not to enroll in such post-secondary education institutions. Strayer Education Inc (NASDAQ:STRA) has put in place several initiatives to tackle these issues. To help prospective students with affordability issues, Strayer Education Inc (NASDAQ:STRA) recently announced that it will freeze tuition rates for all current students through 2014.
Also, Strayer Education Inc (NASDAQ:STRA) has always tasked its campus business offices to advise students on their plans for funding their education. Furthermore, it also introduced “The Strayer University Graduation Fund,” which will encourage its students to complete their degrees, and improving affordability at the same time. Under this scheme, Strayer Education Inc (NASDAQ:STRA)’s students earn a Tuition Award for every three classes they passed. Students have the opportunity to shave off about a quarter of their tuition fees, and given the Award can only be redeemed in their final year, students are ‘motivated’ to stay the full course.
Structural disadvantage of not-for-profit competitors and lower regulatory risks for Strayer
In most industries, the government-backed 800-pound gorilla tends to be inefficient and lack flexibility. There is a similar story in the education sector. The non-profit education players have a large market share of the education space, and have an advantage in funding from both the government and philanthropic contributions. However, this masks the fact that they are burdened with huge pension debts on their balance sheet and are more rigid than their for-profit counterparts in areas such as cost-cutting or admissions.
According its most recent 10K, Strayer Education’s cohort default rate for the 2010 federal fiscal years was 8.6%, compared with the national average of 12.9%. Strayer Education Inc (NASDAQ:STRA)’s cohort default rates are also well below the new 40% cohort default rate ceiling stipulated by the Department of Education. As a result, Strayer Education is less exposed to regulatory risks, given that failure to comply with the 40% ceiling will possibly result in it losing eligibility for participation in Title IV loan programs.
Peer comparison
Strayer Education’s peers include Apollo Group Inc (NASDAQ:APOL) and DeVry Inc. (NYSE:DV). Strayer trades at a premium to its peers with a forward P/E of 15, compared with Apollo and DeVry which are valued by the market at 9 and 12 times forward P/E. Strayer is highly geared with a gross debt-to-equity ratio of 387%, while Apollo and DeVry Inc. (NYSE:DV) have relatively strong balance sheets with gearing below 10%.
Apollo Group Inc (NASDAQ:APOL) is one of the largest for-profit education services providers globally, and it runs University of Phoenix, the largest for-profit university. In late 2010, it initiated a three week University Orientation Program, which is compulsory for all prospective students with less than one year’s worth of college credit, to allow students to have a first hand experience of higher education. Although this has the effect of reducing short term enrollment as some students drop out before the conclusion of the orientation, I am positive that it will eventually result in higher graduation rates for University of Phoenix. Apollo Group Inc (NASDAQ:APOL) shut down 115 University of Phoenix locations in October 2012, as part of an effort to rationalize its non-core university campuses and satellite learning centers.
DeVry Inc. (NYSE:DV) is differentiated from its peers by the fact that it is the only listed education services provider running medical and veterinary courses. DeVry Inc. (NYSE:DV) is also diversified in terms of program specialization and degree offering levels. More than 50% of its students are enrolled in areas of healthcare and technology, which are experiencing stronger demand. It derives about half of its enrollment from bachelor programs, with the remaining 50% split almost equally between associate and Master programs. Like its peers, it has also engaged in cost saving initiatives such as optimizing school locations and cutting back on unnecessary spending.
Conclusion
I love to look for opportunities in beaten down sectors like for-profit education. Valuations for the sector are attractive, given that most negatives have been factored in. On a comparable basis, Strayer Education is more expensive and leveraged than its peers. I will favor Apollo Group Inc (NASDAQ:APOL) and DeVry Inc. (NYSE:DV) over Strayer Education, given their stronger balance sheets and more attractive valuations.
Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Should You Stray Away From This For-Profit Education Services Provider? originally appeared on Fool.com is written by Mark Lin.
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