For-Profit, Investors, University & College - Written by on Tuesday, May 17, 2011 2:49 - 0 Comments

Education stocks 2011 Outlook: Overcast with Storms

TheStreet breaks down nine companies and talks to Wall Street analysts James Samford of Citi, Robert C. Wetenhall of RBC and others to get their take. This is a simple primer for the major education players company by company by’s Miriam Reimer

Bob Phillips, managing partner at Spectrum Management Group, told TheStreet “the general macro outlook for the sector is not good.” He views the education sector as “a bubble fueled by free government money.”

Citi analyst James Samford suggested investors “stick with the clicks,” meaning schools that offer online postsecondary education programs as opposed to more traditional classroom and campus settings. He estimated that nearly a third of all students took at least one course online in 2010. Nearly half of students taking at least one online course, around 3 million, were taking programs exclusively online he said, a number he expects will grow to 5 million by 2015.

Samford also encouraged investors to consider schools with lower-priced programs. Even as the nationwide unemployment figure is expected to drop by 60 basis points this year, “sustained unemployment levels above 9% will continue to offset a complete tailwind reversal” that would normally affect school stocks during a recovery.

Some interesting comments which underline the uncertainty of how the ‘gainful employment’ will hit the bottom line, but some companies show areas for growth:

APOL, Wetenhall noted that “investors are starting to give Apollo credit for improving the quality of its business model, but remain cautious due to poor enrollment visibility.”

CECO, Citi’s Samford said that revisions to the gainful employment rule could negatively impact Career Education by 40%, though some level of bearishness seems already priced into thestock. Based on his “bear case scenario,” Career Education would trade within 4% of its historical average price-to-earnings ratio.

DV, An attractive segment in the education space this year is with schools that offer nursing programs, as DeVry does through its Chamberlain College of Nursing. Samford said schools should benefit from nursing student enrollment after U.S. nursing schools turned away nearly 55,000 qualified applicants in 2009 due to budget restraints and an insufficient number of faculties.

EDMC, RBC’s Wetenhall recently reiterated a sector perform rating on Education Management shares, maintaining a $15 price target. He believes that questions over EDMC’s ability to remain within regulatory compliance will curb the stock’s growth until a revised gainful employment rule — and therefore, greater clarity about the future of the sector — emerges.

COCO, Wetenhall called the Everest Colleges parent “speculative but worth the risk” based on recent management changes, and said “excessively low investor expectations” will lead Corinthian to outperform. “We expect that Mr. Massimino will leverage his experience in running public companies in the health care and for-profit education sectors to develop a rehabilitation plan.”

LOPE, Samford said Grand Canyon, along with Bridgepoint Education and American Public Education, will benefit from offering relatively lower-priced programs as regulators and potential students pressure schools “to take a closer look at value proposition.” He also said they have lower regulatory exposure.

ESI, Citi’s Samford noted that ITT Educational Services, which offers the highest-priced educational programs among its peers, will face tailwinds as regulators and consumers pressure schools to examine their value proposition. Gainful employment rules could hurt its earnings by 40%.

STRA, Wetenhall of RBC expects Strayer to post enrollment growth of 13% in 2011, while revenue will jump 18% year-over-year. The analyst’s EPS estimate is for 18% growth to $11.40. While a number of its education peers have been criticized for utilizing incentive-based recruiting practices, Strayer Education never paid incentive compensation to its recruiting staff, according to Wetenhall’s research.

BPI, Bridgepoint would only need to lower its tuition by a single-digit percentage to be in compliance with the gainful employment rule’s expected debt-to-earnings component, Samford calculated. With a weighted repayment rate of 45.2%, it is already in compliance with the repayment rate minimum necessary to be eligible for federal aid money. But they announced a disappointing outlook.

CPLA, Samford expects CPLA to benefit from a corporate recovery this year and next, and an expected reinstatement of tuition reimbursement programs among large corporations — a practice many gave up amid the recession. “While we recognize that new student growth is likely to slow down due to competition for high quality leads, we believe CPLA’s high persistence rates (average quarterly persistence rates in the high 80% range) can sustain double digit total enrollment through 2012,” he concluded.

APEI, Wetenhall tapped American Public Education among his top picks in the education sector, citing his view that APEI could outperform if military student enrollment grows with soldiers returning earlier-than-expected from the wars in Iraq and Afghanistan.

Full company profiles at here.

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