Profits In For-Profit Education

Whether it is a late-night ad for a graphic design school, an ad in the middle of Good Eats for cooking school, or yet another ad about some IT training program that "changed a person's life", for profit-education is a fixture in the United States. The question remains, though, as to whether there is still money to be made in a sector that has had quite a long stretch of exceptional growth.

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Apollo Group (Nasdaq:APOL)
Apollo generates nearly all of its revenue through the well-known University of Phoenix program; arguably the for-profit program that comes closest to a traditional university in terms of the breadth and depth of programs it offers. The largest player by enrollment, the company has had some difficulties, as the SEC is informally investigating certain revenue recognition policies and the company has come under criticism for the quality of it academic programs.

Nevertheless, the valuation here is very appealing and even if the Department of Education tightens standards for this industry, Apollo stock should have room to move higher.

Career Education (Nasdaq:CECO)
Like Apollo, Career Education has faced some controversy relating to the quality of its academic programs. Nevertheless, the company has over 100,000 enrolled students, about 40% of the enrolled in the very profitable online programs. Career Education does not have the robust returns on capital of Apollo (due in part to the large number of campuses), but the valuation is likewise undemanding. There is money to be made from CECO stock, but it would not be my first pick in the sector.

DeVry (NYSE:DV)
As one of the oldest companies operating in the space, DeVry has an appealing structure to its business. The programs that DeVry offers are broad enough to have wide appeal (business, IT, health care, etc.), but focused enough to give the company a competitive edge without cutting corners. To that end, the company boasts high placement rates and strong average starting salaries.

DeVry boasts an appealing return on capital and strong growth prospects. DeVry is not the cheapest stock in the sector, but you are paying a bit more for quality and the stock is nevertheless still undervalued enough to be quite interesting.

ITT Educational Services (NYSE:ESI)
ITT could be one of the companies at risk from stricter government standards, as the company's programs are relatively expensive and starting salaries for graduates are relatively low according to PayScale. Although the company does have a solid brand name and is looking to expand its online offerings, this is a cheap stock that is cheap for a reason - namely, it is a riskier play within the sector.

New Oriental Education (NYSE:EDU)
New Oriental is the clear "China play" in this group, as this company specializes in preparing Chinese students for overseas academic tests (like TOEFL and SAT) and improving their English. The company also has a meaningful business in domestic test prep and, given the one-two punch of the importance of education in China and the attention lavished on these single children, it is a good business to be in. The company has facilities in over 40 cities in China and has managed to push through double-digit tuition hikes over the last few years.

Unfortunately for investors, this is a well-known story. Accordingly, while the growth potential and the strong profitability of the business is intriguing, the valuation is just too high for me to be comfortable buying these shares today.

Universal Technical Institute (NYSE:UTI)
UTI is a much more focused provider of educational services, with a clear emphasis on mechanical training programs. Tight relationships with manufacturers give the company an enviable placement rate, and short program durations are attractive to potential customers. Unfortunately, the short program duration create difficulties as the costs often exceed the annual government education aid limits. More unfortunate from an investment standpoint, this company has quality fundamentals, but a valuation that does not leave much room for excitement.

Is Education Counter-Cyclical?
One potential concern for investors is whether education is a counter-cyclical investment play. The idea here is that when the economy is weak, people refocus on their education as a way of maintaining their employment or finding a new career path. If that is true, then it is reasonable to expect that economic recovery might dampen the prospects for these companies.

I do not necessarily share this view. In a weak economy people lose their jobs and many of those who keep their jobs still fear losing them. That is not a conducive environment for taking on the debt and added costs needed to go to school. Moreover, with the credit crunch that has accompanied this latest downturn, I have to wonder whether enrollment has been stymied by a shortfall in students able to secure loans for school.

Not Without Its Warts, But Here To Stay
While there are plenty of problems with the for-profit education sector, I really do not see it going away. I believe investors can mitigate their risks by sticking to the higher-quality names and those companies that offer a good trade-off between tuition costs and salaries after graduation. To that end, I would be most interested in Apollo and DeVry today, but would certainly consider New Oriental and UTI if the stocks sold off. (For more stock analysis, take a look at The World Of Commodities Outside Energy And Gold)

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