It's back to school time, so let's take a look at education
stocks. The macro backdrop facing the sector is
mixed. The slow growth economy and relatively weak labor
market put a premium on education, and should raise the need for
training, certification, and a degree. However, high
education costs and fears over student loan debt are headwinds
for the sector. Further, there is regulatory uncertainty as
politicians focus on the value of education and attempt to
protect students from debt burdens and paying for a poor
The New York Fed indicated that student loan debt rose $8 bln
in the quarter ending June 2013 to a total of $994 bln.
Debt is on the path of tripling since the first quarter of 2005
when it stood at $363 bln. The 90 day delinquency rate was down
0.3% in the quarter to 10.9%. The delinquency rate has
eased recently, but remains in a longer term uptrend. The
New York Fed said the average student loan balance was about
$24,800 at the end of 2012.
The high level of debt and extreme cost of education is
causing politicians to tie funding for some state colleges to
student earnings. Massachusetts has done so with community
colleges and Organ Senator Merkley is reportedly going to
introduce a bill to link state funding to student earnings.
HR 1911 was recently passed and links the student loan
interest rate to 10 year treasury yield with an 8.25% cap.
The recent rise in rates will bolster the cost of
Maybe a positive trend starting:
Capella Education (
) was recently approved by the Department of Education for a
competency based degree. The program focusses on learning
as opposed to meeting credit hour standards. Other
universities are applying for similar status. This
movement may help to reduce the cost of education and drive
enrollment. Devry (
) is looking to be approved for competency based degree
The table following displays the valuation of a select group
of publically traded education companies. Just because a
stock looks cheap or expensive is not a sole reason to invest or
avoid, but the table provides a look at relative value in the
sector and helps to flush out the story.
ITT Education Services (
) holds the cheapest valuation. It is priced with the
lowest PEG ratio and 12 month forward price to earnings ratio,
and the second lowest price to sales ratio. It is also
trading at a discount to its 10 year median PEG ratio of
Capella Education looks like the most expensive with the
biggest PEG ratio and highest 12 month forward price to earnings
ratio. Its price to sales ratio is the second
largest. The market is paying up for its competency based
program offering. Capella's median PEG ratio is
Taking it a step deeper, Apollo Group (
) leans on the inexpensive side and Bride Point Education (
) rests on the rich side of valuation.
Earnings estimate revisions:
The next table displays the Zacks Rank, the trend in earnings
revisions over the past thirty days, and the level of earnings
per share for the current and next fiscal years.
The Zacks Rank ranges from #1 (Strong Buy) to #5 (Strong Sell)
and measures the strength of earnings estimate revisions.
Based on a proprietary set of measures, stocks which are seeing
earnings estimates rise (fall) by the greatest degree are a Rank
#1 (Rank #5). Notice that Cepella is the only Rank #1, while
Bright Family Solutions (
) and Grand Canyon Education (
) are Zacks Rank #2. The other companies are Zacks
Cepella has seen the large number of upward earnings revisions
for the next two fiscal years and no downward revisions over the
past thirty days. Devry and ITT stand out as finding downward
revisions relative to upward revisions, but Bright Family
Solutions and Bridget Point Education catch some attention for
the next fiscal year.
The table reveals that ITT and Apollo may be cheaply priced
because of the outlook for poor earnings growth in the coming
year. Notice that both companies are expected to see
negative EPS growth. Bridge Point is also forecast to see
Bright Horizon and Grand Canyon are forecast to post the best
Although ITT Education Services and Apollo look cheap on the
basis of valuation, they are showing contracting earnings growth
and it is hard to embrace these names. They may be
studying a turn around story but have not passed. A quick look at
the charts also provides little insight, as both appear to be in
longer term basing patterns, at best. It is hard to get
Capella may have the strongest story with its competency based
degree; however, the market seems to be pricing this dynamic
given the valuation. Given the upward revision to earnings
estimates, which is probably based on the tailwind created by the
new degree program, the stock should be of interest to those
investors who like the upward momentum in earnings estimates.
Aggressive investors, who can tolerate risk, should take a
Looking at the middle of the pack, Bright Horizon may be of
interest. There is not much fundamental history as this
stock is a recent IPO, but the low price to sales ratio,
reasonable PEG ratio and EPS growth stand out, providing appeal.
Technically, the stock has been ranging between about $30 and
$38. A move out of the top of this range could spark some
technical interest and draw in some buying.
That's my lesson for today.
APOLLO GROUP (APOL): Free Stock Analysis
BRIGHT HORZN FS (BFAM): Free Stock Analysis
BRIDGEPOINT EDU (BPI): Free Stock Analysis
CAPELLA EDUCATN (CPLA): Free Stock Analysis
DEVRY INC (DV): Free Stock Analysis Report
ITT EDUCATIONAL (ESI): Free Stock Analysis
GRAND CANYON ED (LOPE): Free Stock Analysis
To read this article on Zacks.com click here.