The for-profit education industry has been going through
trying times recently. Industry watchers had tied its fortunes
with those of Mitt Romney in the Presidential elections. Now that
President Obama has won that round, industry baiters are
sharpening their knives, anticipating a slew of regulatory
measures that will tighten federal aid and make the industry more
These are but symptoms of the deep-seated problems which have
been plaguing for profit colleges for some time now. Among these
are appreciably high levels of student debt and falling
graduation and job placement rates.
Only a few years ago, University of Phoenix owned by
Apollo Group Inc.
The Washington Post Company
) Kaplan were gaining a substantial number of students and raking
in the profits. The situation has changed drastically with a
decline in enrollments in recent years. According to data
released by The National Center for Education Statistics, college
enrollment declined by 0.2% in the fall 2011. However,
for-profit colleges saw the number of students signing up for
courses falling far more, by 2.8%.
The focus is now on rationalizing operations and cutting profits.
In October this year, Apollo said it was slashing 800 jobs and
closing 25 campuses over the year. This is an effort to cut costs
by $300 million by fiscal year 2014 to combat lower profits and
falling student enrollment. In November,
Career Education Corp.
) followed the same trend, announcing 900 job cuts and closure of
The primary reason behind this scenario is fierce competition
from nonprofit and state schools and questions about whether for
profit education is actually worth the amount it costs. Students
are now closely evaluating the pros and cons of taking up such
courses which has led to stiff competition for a fast shrinking
One of the indicators of rising competition in the industry is
rising ad spends. According to search analytics firm SpyFu, the
University of Phoenix has been spending close to $400,000 per day
on advertising. Washington Post's Kaplan,
ITT Educational Services, Inc.
) have also significantly raised their marketing expenditure. All
of them now feature among the top 25 advertisers on
This leads us to the primary criticism leveled against the
industry that it has been wasting taxpayers' money. Nearly $32
billion of these funds flow into its coffers every year and the
prominent for profit colleges were counting heavily on a Romney
victory to keep the cash coming in.
As we can see from their ad spends, a large portion of this
money is diverted towards advertising. Senator Tom Harkin's
scathing report found that in 2009 22.7% of revenue was spent
towards marketing and recruitment, while only 17.2% was spent on
The future seems to belong to specialized and niche schools like
Grand Canyon Education, Inc.
). Enrollment has increased by a whopping 60% since 2009,
touching 44,435 as of June 30 for this Christian school with both
a traditional campus in Arizona and online operations. Similarly,
American Public Education, Inc.
) which caters to military and public safety personnel has seen
enrollments rising 45% to 92,900 at the same time.
So all is not lost, and both kinds of institutions may survive.
The first are the older more conventional kind of for profit
colleges owned by the likes of DeVry Inc., which will compete
harder by simultaneously increasing ad spends and cutting costs
to attract students in a fiercely competitive sector.
The second are those which will differentiate themselves on
offerings and target audiences such as Grand Canyon Education,
Inc. In keeping with this argument, both these companies
currently hold a shot-term Zacks #2 rank (Buy).
AMER PUB EDUCAT (APEI): Free Stock Analysis
APOLLO GROUP (APOL): Free Stock Analysis
CAREER EDU CORP (CECO): Free Stock Analysis
DEVRY INC (DV): Free Stock Analysis Report
ITT EDUCATIONAL (ESI): Free Stock Analysis
GOOGLE INC-CL A (GOOG): Free Stock Analysis
GRAND CANYON ED (LOPE): Free Stock Analysis
WASHINGTON POST (WPO): Free Stock Analysis
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