Tempted by For-Profit Ed Stocks? Read This
The latest enrollment figures from for-profit colleges suggest that damning publicity over their business practices, as well as tighter government regulations that followed it, has done deep and long-lasting damage to the industry. Forecasts for the five biggest publicly-traded schools now call for revenue declines to continue at least through fiscal 2014. Share prices are down between 32% and 86% in the past two years, turning some once-heady investments into major losers, as seen in a stock chart.
Spring 2013 enrollment in for-profit colleges, both publicly-traded and private, is down 8.7% from a year earlier, according to a according to a report published May 16 by the National Student Clearinghouse Research Center.
Most of those big, traded for-profits didn’t do even that well. In the past few weeks: University of Phoenix parent Apollo Group (APOL) reported total enrollment down 15.5%; DeVry (DV), down 6.7%; Corinthian Colleges (COCO), down 5.7%; and Career Education Corp. (CECO), down 16%. Education Management Corp. (EDMC), the second largest for-profit after Apollo, reported average student enrollment down 11.4%. Smaller, popular sector investments fared no better. Enrollment is down 14.2% at ITT Educational Services (ESI) and down 9% at Strayer (STRA).
In terms of actual bodies, Clearinghouse puts it this way: Total enrollment in for-profits spring 2013: 1,347,238; spring 2012: 1,476,010; spring 2011, 1,626,756. That’s about 280,000 fewer students, or a 17% drop over two years.
Equally alarming are the falls in new enrollments this year, which exceeded falls in total enrollment at several schools. The declines reflect both cost cutting measures – Apollo, for example, is closing some 100 campuses -- as well as continuing difficulty with recruiting. None of those big five companies added more new students this year than they did last. That means that none of these revenue lines is likely to take a positive turn any time soon.
This battering follows two years of very public criticism of the industry, which started with vocal short sellers in 2010 and snowballed into a damning Congressional report last November. Among the accusations: The industry, which gets its profits from government-backed loans and grants to students, was charged with encouraging students to accumulate high debt for training in careers that could not realistically fund repayment. The revelation of extremely high loan default rates led to new regulation, including rules enacted in 2011 that curbed predatory recruiting practices. Other new rules eliminated grant eligibility for students without high school degrees or GEDs.
These actions apparently hurt the industry’s ability to fill their classes, either indirectly through the bad publicity or directly through the new regulations. Since 2011, the last year the industry reported total enrollment gains, the numbers are down 17%, according to data crunched from the clearinghouse report. Many of the for-profits have closed some of their schools, and some, such as American Career Institute, suddenly shut down completely. All of the companies are trying to cut costs to shore up very damaged profit margins. Note the change in gross margins (rather than actual gross margins) in the chart below.
If you're a value investor doing some company research and looking for money to be made, you may be lured by cheap-looking shares, like Apollo's 7.3 forward price-to-sales ratio. But these valuations aren't very useful at the moment, while the schools continue to shed students at unpredictable rates. This year's new enrollment figures, as bad as they were, may not be the worst we see from the industry. Between a clampdown on recruiting tactics, a tightening of loan eligibility requirements, a step-up in online competition and a greater awareness of the hazards of such student debt, these schools' future size and success are still very uncertain.
Theoretically, shrinking competition should eventually help enrollment and profits at the survivors, particularly those that have taken aggressive cost-cutting measures. That works best if they can maintain tuition prices somewhere near current levels. Right now, the data shows little indication that more students are getting interested in signing on for such deals. The backlash from this chapter has been extensive.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org. For a demonstration of YCharts Platinum, go to http://ycharts.com/info/pro_platinum.