Education-related stocks seem to be coming up in every value stock screen. The reason they are showing is simple. First, over the past few years, for-profit education providers have benefited from tremendous growth and profits. Second, share prices amongst the industry names have fallen hard while the balance sheet and income statement still look good. So, is there opportunity in for-profit education for investors?
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There's a bit more to the story. For-profit education providers are under intense pressure by the government and other organizations who are accusing the schools of boosting enrollment in order to boost revenues without regard to student qualification. The schools are being accused of having very liberal acceptance requirements in order to boost enrollment, since students are paying for college with student loans provided by the U.S. Department of Education. The charges further allege that students are graduating with loads of debt and inadequate skills to find a job to pay off that debt. It's beyond the scope of this article to go into the details, but that is the basic situation. Eventually, investors dumped shares in fear that enrollment rates will decline and reduce growth.
Clearly, there are issues with the enrollment procedures in the industry. However, the value of education is without question. And for-profit schools that offer online or evening studies are very popular for working adults who want to further their schooling without giving up a daytime job. So at the end of day, there will be for-profit education providers. Whether or not the price is right is up to the individual investors. But clearly the numbers are intriguing. Career Education (Nasdaq:CECO) trades around $6 a share. The company has a market cap of $400 million and over $280 million in cash, on the balance sheet.
Corinthian Colleges (Nasdaq:COCO) has taken the hardest hit. Shares trade for around $2.60, and the compnay has a market cap of approximately $225 million. The company earned over $120 million in EBITDA over the last 12 months. Net debt is about $98 million. About 25% of shares are held short. If the company's fortunes improve, shares could move up quickly.
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Strayer Education (Nasdaq:STRA) shares trade around $100, off from just under $150 over the past year. The shares yield 4.3% and trade for 12 times earnings.
New Oriental (NYSE:EDU) has held up the best given that it operates in China where education is a prized privilege. As such, EDU is not as cheap as other names in the space. In fact, trading at 21.5 times forward earnings, EDU clearly appeals to investors who want the China exposure. The company boasts a market cap of $3.85 billion, no debt and over $757 million in cash.
The Bottom Line
The education industry is under significant pressure and the valuations look appealing. Yet investors will have to get comfortable with the headwinds currently facing the industry and compare them with the potential positives in order to determine investment merit. Battered down stocks that were left for dead can come back to life very quickly if the tide turns.
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