Traditional Campus Gives For-Profit College An Edge

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For those who are looking for a private Christian university at state tuition rates, Grand Canyon University may just be the place that offers the best of both worlds.

Phoenix-based provider of regionally accredited post-secondary education runs 97 graduate and undergraduate degrees at seven colleges. Its programs are held online as well as at a traditional campus. The on-ground campus counts 6,500 students, while its online campus has 46,000 enrolled students.

Its parent,Grand Canyon Education ( LOPE ), went public in 2008 after it converted from a nonprofit university in 2004 to a for-profit privately funded school with a business plan of creating an online campus. In '04, the school was debt-ridden and about to close.

"We went public in November 2008, and we got an infusion of $254 million worth of funds and then we executed on our business plan with that money," said GCU's president and CEO Brian Mueller. "And now, what we have is a very thriving university with very low tuition rates at no expense to either taxpayers or donors, and our investors are getting a very good return on their money."

Low Tuition

GCU's traditional campus tuition rates are $7,800 for an average student, after scholarships. The university's published rate is $16,500.

"For a private university, that's a really, really low tuition rate," said Mueller. "Most students that attend private universities are paying $25,000 or more per year after scholarships for tuition. And so that's a big part of the reason we're growing."

Indeed, GCU's growth projections are impressive in a struggling for-profit education sector. Mueller expects to nearly triple its traditional campus students to 15,000 in the next three years. For the online university, he's projecting an annual student growth rate of between 6% and 8%. This is equivalent to total growth of between 8% and 10% and an increase in revenues of 10% to 12%.

While these numbers stand out in comparison with other for-profit educational institutions, the company is exceeding those in the short term. Last year, GCU was able to grow its enrollments by 19%, while the industry's declined by 10%.

GCU's earnings per share grew at a rate of between 21% and 52% in the last six quarters, while revenue increases ranged from 10% to 25%.

"What's unique about Grand Canyon is their differentiated position," said Peter Appert, senior research analyst at Piper Jaffray. "The post-secondary business is very challenging for the for-profit companies because the market is crowded, it's competitive, it's increasingly commoditized.

"And to really stand out and generate enrollment growth in this crowded and commoditized market, you have to have something that differentiates you from the crowd."

Appert points out several things that differentiate GCU. First, they have a very strong campus presence in Arizona. They have a Christian affiliation. Their tuition pricing is competitive with public schools. And finally, they focus on program areas that are in demand, such as nursing.

The for-profit education industry experienced tremendous growth in the early years while catering to a professional demographic desiring to pursue online as well as on-campus degrees. But in the past three years, the growth trends have reversed as nonprofits have entered that area by offering programs to nontraditional students as well. With that, the capacity, and competition, in the market increased substantially, while driving down profits.

That's why analysts believe that GCU is exceptionally positioned thanks to its diversified structure.

"I think the companies that don't have differentiated offerings, those companies will find it difficult to grow. I don't think they are going out of business, but I think it's going to be hard for them to generate unit growth," noted Appert.

"The hybrid model that we have, which is the traditional ground campus combined with an online campus, sharing a common infrastructure, has produced tremendous efficiencies," said Mueller.

The programs that are offered online or on campus are the same and cater to the working adult, 32-33 years old. A lot of the students have families and want to be associated with a viable, fast-growing campus, even if they are getting an online degree, noted Mueller. The university also has low student-teacher ratios, with an average class size of 20 students.

Local Region

"They're also focusing on a local region," said Jeffrey Silber, managing director at BMO Capital Markets. "A lot of the schools are national, so it's a lot more difficult to market that way."

Another factor in the for-profit industry slowdown was that the regulatory environment became stricter. Among other things, it removed incentive compensation for recruitment of new students. Currently, the talk of gainful employment requirement has again come back.

"Gainful employment means that they have to be able to prove that the programs that they're offering, students aren't taking on more debt than the amount they are making in earnings," said Silber. "Incentive compensation means that the campus can't incentivize their recruiters based on the number of students they bring in."

Neither GCU nor analysts view this as a concern for the university as it's already compliant with many of those criteria.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: LOPE

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