Back to Main

Can Grand Canyon Lead For-Profits Out of The Abyss?

By: Investor's Business Daily
Posted: 3/8/2013 4:39:00 PM
Referenced Stocks: APOL;CPLA;DV;LOPE;STRA

The fact is, for-profit educators are getting schooled.

Not only is the federal government tightening thumbscrews regarding student debt ratios and dropout rates, but students are backing off as they figure out that the schools' degrees -- and many traditional college degrees -- aren't always a cost-effective way to get an edge in a complex job market.

What's more, growth funds and other investors have stepped off to a safe distance from the volatile stocks.

The school "stocks are 'cheap,' but not values," said Peter Appert, a senior research analyst with Piper Jaffray. "They have strong balance sheets, but are not good investment opportunities until you see positive growth and new student starts on a sustained basis."

New enrollments have slumped as students shy away from the for-profit schools during a lagging economic recovery in which higher education is no longer viewed as a golden ticket to a high-paying job.

That has dampened the bulk of for-profit school stocks and kept the Consumer Services-Education group low in the rankings among 197 industry groups tracked by IBD.

About a third of the group's 30 stocks are based and operate almost exclusively in China.

Most of the rest are U.S. schools and, among those,Grand Canyon Education ( LOPE ) has been the group leader. The stock climbed 40% in the past 12 months and was an IBD 50 stock through late February.

Business

Traditional and for-profit universities have some fundamental differences.

Traditional universities operate under a not-for-profit business model. They are held accountable to their students, parents, alumni, professors and wealthy donors.

For-profit universities likeDeVry ( DV ), University of Phoenix (owned byApollo Group ( APOL ) andStrayer University ( STRA ) are accountable to their shareholders first.

Traditional universities often pride themselves on learning for the sake of learning. But persistently high unemployment has made potential students increasingly focused on their employment prospects after graduation.

For-profit universities offer programs targeted to high-probability job sectors, from nursing to computer programming to business administration, taking a much more "trade school" type of approach.

"Traditional schools are always going to be uncomfortable in casting themselves in those terms. They don't like to be thought of as job training programs," said Trace Urdan, an analyst with Wells Fargo.

For-profit universities have no such reservations.

"There's been a missing link here in higher education for many, many years," said Apollo Group Chief Executive Greg Cappelli in a Q1 conference call. "It's great to help people get a high-quality education. Translating that into a career, especially one that they're looking for and all the things that actually have to go into that ... that's where our focus is."

Market

For-profit universities target the "nontraditional student" -- the single mother looking to get a higher paying job, a college drop-out wanting to go back to school or a person who's working full time and wants to get another degree. Most of the for-profit schools offer schedules and curricula built for online, weekend and night classes to lure that target audience.

Traditional universities have caught on. Most major universities are implementing or expanding online degree offerings, particularly in lucrative territories such as MBAs, master of business administration degrees.

Strayer and Apollo Group have been losing market share as more students opt to enroll in the often cheaper and, in many cases, more respected traditional schools online.

The competitive market has curtailed the for-profit universities' formerly explosive EPS growth. Apollo Group reported double-digit yearly EPS growth from 1993 until 2005. For the past two years the company posted double-digit declines. To remain competitive, the for-profit institutions need to differentiate from their competitors, Appert says.

Grand Canyon Education, which comes closest in the group to a traditional-style school and campus model, has consistently been the most profitable. The Phoenix-based company has reported yearly double- or triple-digit growth since its IPO in 2008.

Grand Canyon invested $150 million in remodeling its campus in 2006. In 2009, it began a $60 million expansion. Next season, the school will become the first for-profit university to compete in an NCAA Division I athletic conference.

"Grand Canyon is unique. Their undergrad campus tuition is offered at a discount," Urdan said. "The ground campus offers the online students credibility, like with its NCAA teams, and the online students subsidize the prices for the ground students."

But Appert says Grand Canyon's success will be hard for other schools to replicate. The university began in 1949 as a nonprofit teachers' college. The Christian school got into financial trouble and was bought by a private equity firm.

DeVry was taken private by Bell & Howell in the 1960s, then spun out in 1985 as a chain of trade school sites with a heavy television advertising program. Apollo Group and University of Phoenix were both founded by John Sperling, a pioneer of the for-profit education movement for working adults in the U.S.

Today, students may opt to go to University of Phoenix, which offers associate's degrees like a traditional community college. But it will cost them. In 2012 a typical student would pay $24,500 to earn an associate's degree at University of Phoenix. The same degree would only cost $4,087 at Phoenix College, a community college.

In return for the high price, University of Phoenix ads promote its partnerships with top companies, as well as up-to-date technology and equipment in their classrooms, according to Urdan.

Somewhat unlike community colleges and other traditional schools, University of Phoenix and its peers have a profit incentive. If a student drops out, the schools lose profit.

"They want you to come to school," Urdan said, "so there is a lot of hand-holding."

Many students have started to think twice before enrolling in a for-profit university. Quitting classes at a less expensive community college may cost nothing but the lost registration and parking fees a student has already paid. Bailing out of a more expensive for-profit university likely will require paying back the school or lender, and still without the new degree that would provide higher paying job opportunities.

Climate

Enrollment in higher education used to be counter-cyclical, a lure for investors . People turned to continuing education when times were hard, in order to land higher-paying jobs. This time around, the for-profit schools have fallen with the broader economy, according to Appert.

Part of that is due to the Obama administration's focus on drop-out rates and student debt loads. Urdan says students themselves have also become more savvy.

"Students are reluctant to borrow if there might not be a job at the end," he said.

Congress has zeroed-in on the penalty for failure. A July report from the Senate Committee on Health, Education, Labor and Pensions led by Sen. Tom Harkin, D-Iowa, condemned for-profit universities for aggressively recruiting students without informing them of the potential pitfalls of not finishing their degrees.

"How much responsibility should the student have?" Urdan said. "Tom Harkin doesn't want it to cost the students anything."

Republicans disagreed with Harkin's report and want students to take more responsibility for incurring educational debt. Sen. Marco Rubio, R-Fla., argues that all schools, for-profit and not-for-profit institutions, should report data like graduation rates and employment rates of grads.

One way for-profit schools have approached the problem is by accepting low-cost credits from college prep sites like StraighterLine and Sophia, which is owned byCapella Education ( CPLA ). The acceptance of such cheap, intro-level credits could help students graduate early with less debt.

"Don't rule out for-profit schools as they respond and adapt to the new world of education," Urdan said. "They might even lead the way because the market is demanding that from them."

Outlook

Wells Fargo's Urdan is confident about the long-term success of the industry but he sees problems in the near term.

"The stocks' visibility is not terrific," he said. "Growth investors are still staying away."

He believes that the market has bottomed, but doesn't see a lot of evidence the industry will get better soon. If the economy and student enrollment don't pick up, Urdan is worried investors will forget about the stocks and the "industry will become orphaned."

Appert believes the business will continue to remain challenged from "a regulator and operating perspective."