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3 School Stocks Trying to Survive Industry Challenges

Lower enrollment due to higher unemployment caused by COVID-19-led restrictions, increase in employee compensation costs and advertising and marketing expenses are pressing concerns for the Zacks Schools industry.

Nonetheless, given the COVID-19 outbreak, for-profit education companies are expected to benefit as online educators are viewing shutdowns as an opportunity to increase reach among students. Moreover, for-profits education companies are forging corporate and community college partnerships to educate their workforce. Prudent cost management and continued focus on driving profitability along with strategic initiatives are expected to lend support to some prominent players in this industry like K12, Inc. (LRN), American Public Education, Inc. (APEI) and Grand Canyon Education, Inc. (LOPE).

Industry Description

The Zacks Schools industry comprises for-profit education companies that offer undergraduate, graduate and specialized programs in areas of finance, accounting, analytics, marketing, healthcare, business and technology. The industry players also offer child care services and career-oriented, post-secondary courses.

Some companies within the industry also provide yoga classes and yoga-related retail merchandise-integrated fitness classes along with conduct workshops and teacher training programs.

3 Trends Shaping the Future of Schools Industry

Rising Demand for Online Education: Amid the novel coronavirus outbreak, for-profit education stocks have been reaping benefits from the rise in virtual delivery of education. As the world struggles to contain the spread of the virus, many for-profit education companies have undertaken initiatives to reach students who aspire to complete their courses as planned, with the help of various online education platforms. Also, classroom type education providing companies like Universal Technical Institute, Inc. (UTI), Lincoln Educational Services Corporation (LINC) and Perdoceo Education Corporation (PRDO) are cashing in on the unprecedented surge in demand for online education these days.

Cost-Saving Efforts, Increasing Use of Technology & Introduction of More Programs: In order to boost profitability, school companies are resorting to aggressive cost cutting through significant layoffs, campus closings and consolidations. Developments like switching to online education programs, increasing use of technology in education, more investments in education, regular introduction of programs and specializations should boost student outcomes along with tie-ups with different organizations to reduce exposure to Title IV funding, improve academic quality and retain students. Many for-profit education companies are investing in non-degree programs and designing programs that are specifically aimed at meeting the educational needs of working adults in targeted professions.
 
Stringent Regulations & COVID-19 Impact: Growth in the industry may get impeded by legal and regulatory issues faced by post-secondary schools in the United States, increased competition, higher expenses for various programs, and shortage of skilled labor. Also, higher unemployment levels may prove detrimental to for-profit education companies.

The COVID-19 pandemic may cause a disruption in educational services. General economic slowdown may reduce the number of jobs available to graduates and lower salaries being offered in connection with available employment, which will affect the companies’ placements and persistence. Additionally, the slowdown may compel students to repay their loans, which could increase institutions’ student loan cohort default rates, ultimately increasing bad debt expense. Higher default rates may also adversely impact the industry players’ eligibility to participate in some Title IV programs, in turn affecting the companies’ operations and financial condition.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Schools industry is an 19-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #228, which places it at the bottom 8% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since October 2020, the industry’s earnings estimates for 2020 and 2021 have been revised 4.5% and 4.6%, respectively, downward.

Despite the industry’s gloomy near-term view, we will present a few stocks that one may consider for the portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Outperforms Sector & S&P 500

The Zacks Schools industry has outperformed the broader Zacks Consumer Discretionary sector as well as the Zacks S&P 500 composite over the past year.

The stocks in this industry have collectively gained 23.5% compared with the broader sector’s growth of 5.8%. Meanwhile, the S&P 500 has risen 14.4%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing for-profit education stocks, the industry is currently trading at 35.5X versus the S&P 500’s 22.3X and the sector’s 31.2X.

Over the past five years, the industry has traded as high as 38X, as low as 15.5X and at the median of 29.1X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

 

3 School Stocks to Keep a Close Eye on

K12 Inc.: Headquartered in Herndon, VA, this technology-based education company has been gaining strength from higher enrollment and cost-saving efforts. Continued demand for online learning options have been benefiting K12’s top line in recent times. Moreover, investments focused on improving user experience, enhancing teacher tools and strengthening student engagement bode well. In addition to higher enrollments and stronger-than-expected student retention (partly attributable to revenues it recognized in relation to services provided in fiscal 2020), the Galvanize acquisition is expected to have contributed to revenues as well.

Importantly, K12 has seen an 18.4% upward estimate revision for its fiscal 2021 earnings over the past 30 days. The stock has gained 25.8% in the past year. This Zacks Rank #1 (Strong Buy) company’s earnings for fiscal 2021 and 2022 are expected to grow 125% and 14.8%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.    

Price & Consensus: LRN



American Public Education, Inc.: Headquartered in Charles Town, WV, this company is an online provider of higher education, primarily focused on serving the military and public service communities. The company has been gaining from increased demand for online courses and nursing programs. Also, initiatives like affordable tuitions, online programs, strategic efforts aimed at improving student success and strong digital marketing campaigns are likely to benefit the company going forward.

Its earnings for 2020 and 2021 are expected to grow 4.6% and 20.2%, respectively. This Zacks Rank #3 (Hold) company has gained 24.4% in the past year. American Public has seen upward estimate revision for its 2020 bottom line over the past 90 days of 34.1%, depicting analysts’ optimism over the stock’s earnings prospects.

Price and Consensus: APEI


Grand Canyon Education, Inc. or GCE: Based in Phoenix, AZ, this company is a regionally accredited provider of online postsecondary education services focused on offering graduate and undergraduate degree programs. GCE has been benefiting from an increase in enrollments at its university partners like Grand Canyon University or GCU as well as growth in the number of off-campus classroom and laboratory sites.

Although a decrease in revenue per student due to the revenue impacts caused by COVID-19 has resulted in a 7% drop in the stock over the past year, the Zacks Consensus Estimate for its 2020 EPS has risen 0.4% over the past seven days. Its earnings for 2020 are expected to decline 1.4% but the same for 2021 are expected to grow 12.8%.
Price and Consensus: LOPE

 

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Universal Technical Institute Inc (UTI): Free Stock Analysis Report
 
Career Education Corporation (PRDO): Free Stock Analysis Report
 
K12 Inc (LRN): Free Stock Analysis Report
 
Grand Canyon Education, Inc. (LOPE): Free Stock Analysis Report
 
Lincoln Educational Services Corporation (LINC): Free Stock Analysis Report
 
American Public Education, Inc. (APEI): Free Stock Analysis Report
 
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Zacks Investment Research

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

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