Education stocks are among the few sectors with growth prospects for 2009. On Wall Street, many believe education stocks will benefit from the upcoming stimulus plan currently being weighed in Washington D.C.
Shares of Apollo Group (Nasdaq:APOL), Career Education Corp. (Nasdaq:CECO), Corinthian Colleges (Nasdaq:COCO) and ITT Educational Services (NYSE:ESI) moved sharply higher last week after it was reported that the proposed stimulus plan would increase funding for Pell Grants by $15.6 billion. The plan also will increase limits on unsubsidized Stafford loans by $2,000. In essence, the government aims to fill the gap caused by the retrenchment in lending by the private sector. Private education companies also would benefit from a surge in demand for services from the ranks of the unemployed who are flocking back to school to acquire more marketable employment skills. (For more about the cost of higher education, read College Cost Reduction Act Helps Students Meet Payments.)
For education companies, the 2009 earnings season began with a bang, as Apollo, owner of the ubiquitous University of Phoenix, reported revenues of $971 million and earnings per share of $1.12 for the quarter ended November 30, 2008. The company's results beat estimates by 14 cents and marked the third straight quarter of a positive earnings surprise. Another surprise for Apollo for the quarter was the decline of its bad debt expense by 60 basis points, from 4.2% to 3.6%. Because the economy is weakening, many analysts believe this metric would have increased.
Of course, all of this earnings and revenue growth does not come cheap, as these stocks currently trade at price-to-earnings multiples of at least twice market levels.
|ITT Educational Services||24||20|
|Career Education Corp.||52||27|
Source: Thomson Financial Networks, as of close on January 16 (Forward P/E: ESI, CECO - December 2009; APOL - August 2010; and COCO - June 2010)
While education companies are enjoying the expansion of government lending, they are not without risk. Apollo received approximately 77% of its revenue from the federal government in the fiscal year ended August 31, 2008. As a recipient of Title IV funds, Apollo and other education companies must comply with extensive government regulations and reporting requirements under the Higher Education Act. Regulations, including limits on loan defaults. Apollo currently faces a lawsuit that accuses it of refunding 100% of Title IV funds to the government for students who had withdrawn from its educational establishments. In addition, Apollo is accused of trying to collect the balances owed from students who had withdrawn. Stiffer regulations could lower default rates and ensure compliance with government limits. (Stay calm, play dead and keep your eyes open for attractive valuations at Surviving Bear Country.)
Even a hint that one these educational companies is struggling to meet regulatory requirements would send the sector into a tailspin. Furthermore, the stimulus package is only a proposal at this point and the details of a final version are unclear. Still, eduction companies will likely see earnings and revenue growth as a result of the forthcoming expansion of government and the swelling ranks of the unemployed.