Business is booming in for-profit, post secondary education. The operative phrase is "for-profit"; we are not talking about government supported universities. More and more people are realizing that education is the key to a secure future, particularly after their low-level jobs are outsourced to foreign companies. You shall see however, that it takes more than just hanging out a shingle. Like any other business, you have to be able to execute.
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Apollo Group (Nasdaq:APOL) is better known as the University of Phoenix and is the recognized leader in online education. Apollo, with a market capitalization of $10.7 billion, lays claim to being the largest private university in the United States with 300,000 students generating $2.6 billion in revenue. Interestingly, over 90% of APOL's students are 24 years old or older.
Apollo's recognizable University of Phoenix name, regional accreditation and solid reputation are quite meaningful when catering to working adults; particularly since 45% of its students receive some level of reimbursement from their employers. Apollo's "junior college" or certificate program is Axia College, that aside from granted Associate Degrees also serves to feed the more senior University of Phoenix. While conventional universities lack a profit motive, the 4,300 enrollment advisors at APOL clearly do have a vested interest.
The risks and potential downside with APOL tend to be systemic with regard to possible price competition and governmental influences. To that end, APOL is having to deal with some options backdating issues. APOL also has a dual class of shares that investors should be aware of. The Sperling family owns the Class B shares which have 10-to-1 voting as compared to the Class A shares the public can buy. The public is along for the ride with very little influence. (For more, see The Two Sides Of Dual-Class Shares.)
Top Notch Management
Strayer Education's (Nasdaq:STRA) roots date back to 1892 when it was the Business College of Baltimore. Today it has 47 campuses, a market capitalization of roughly $2 billion and produces about $277 million in sales. Over 90% of its students pursue an associate, bachelor or masters degree, and like its competitors, Strayer caters to the adult education market, most recently with Strayer University Online.
Strayer has one of the best management teams one could find in this business, with returns on invested capital at 107% since 2001. STRA has recently sold its student loan portfolio, cleaning up its balance sheet and allowing the management to run the school and business and not administer a loan portfolio.
Similar to its competitors, the risks associated with STRA are systemic - governmental scrutiny of its programs and possible price competition. The company's performance is admirable, especially considering that enrollment advisors do not receive any incentive compensation.
Career Education Corporation (Nasdaq:CECO), with a market capitalization of almost $3.2 billion and sales of just over $1.7 billion, is facing some difficult issues. Its accreditation status is under probation and if the company loses that, it also loses the ability to participate in government sponsored student-loan programs. Because of this, CECO's enrollment has declined about 22% in 2006 and is likely to continue declining until the matter is resolved.
At issue are accusations of falsified student records that has the Securities and Exchange Commission as well as the Justice Department investigating the company. Not surprisingly, CECO's financial performance has been abysmal. (For more on the job of the SEC, see Policing The Securities Market: An Overview Of The SEC.)
Furthermore, 37% of the firm's revenue and 66% of its profits stem from the company's online capability. Once these legal woes are resolved, this firm should regain its former reputation as a leader in adult education.
Bull Market for Education
The adult education market is uniquely under-served. There are approximately 60 million people in America alone that do not have more than a high school education. The good news is that, in our knowledge based economy, people are realizing the need for higher education. Adult education firms are positioned to benefit and hopefully their shareholders will too.
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