BOSTON (TheStreet) -- For-profit post-secondary schools, known for their flexible schedules and aggressive marketing techniques, boomed over the past decade, particularly as people bet that a college certificate would boost their employment chances in the midst of the recession.
They also benefited from huge demand for college and vocational programs that the public sector couldn't meet, low borrowing rates, the increased availability of federal student loan funding, including the G.I. Bill and Pell Grants, low cost and online-course delivery.
But the tide has turned on the $35 billion business, and its prospects appear dimmer almost by the day. Its biggest challenge is the increasing government scrutiny over high student loan default rates, questions about whether its degree offerings actually help their graduates further their careers, some schools' ethics in recruiting vulnerable students and, finally, whether demand will wane as the job market recovers.
As a result, investors are giving the educators' shares an "F," despite some analysts' "buy" ratings on these stocks.
The S&P Education Services Index, which tracks for-profit educational firms' shares, is down 21% this year and 28% annually over the past three years, versus the
gains of 10% and 21%, respectively.
At the very least, the industry is due for a shakeout, given the overriding trends it faces. "Despite a spectacular multi-decade run, we believe increased regulatory scrutiny of the for-profit education sector is forcing participants to react and adapt to potentially game-changing rules, which are likely to alter the industry landscape for years to come," wrote Peter Wahlstrom, Morningstar's educational services industry analyst, in a research note last week.
Similarly, S&P analyst Michael Jaffe reported that "following much improved operating results in 2009 and 2010, many U.S. for-profit educators have been experiencing highly diminished performances over the past few quarters, and we see results remaining (that way) for an extended period.
"We think the less favorable outcomes have stemmed mostly from new regulations being put in place by the Department of Education" in an effort to lower student loan default rates, he said.
Although those regulations, which track post-graduation employment and wages and tie them to student loan defaults, "turned out to be less severe than those originally proposed, we still believe this rule will be the most challenging of the group of newly created regulations," Jaffe said.
Federal student aid programs can account for as much as 90% of some for-profit colleges' revenues so the threat of a loss of part or all of such programs could be a serious blow.
The pressure of having to significantly reduce those loan default rates are forcing for-profit schools to toughen their admissions and loan eligibility standards, which will put a big dent in the size of their student body and crimp their profits.
The new regulations take effect in July, but deficient schools' programs will get three years to improve default rates before they lose their eligibility for government-funded programs.
But that's not the only regulatory challenge on the horizon, as last week a bill was introduced in Congress that would prohibit colleges from using money from federal student assistance programs to pay for advertising, marketing and recruitment.
For-profit schools spend an average of a quarter of their revenues on advertising, marketing and recruiting students, which in some cases approaches what they spend on instruction, according to a recent Senate report, which also found that they have spent a combined $3.7 billion annually on marketing and recruiting.
Further undermining potential students' views of the value of post-secondary education are the negative experiences of recent college graduates of both non-profit and for-profit schools. The Associated Press reported Monday that in its recent survey of young college graduates, half said they are either jobless or underemployed in positions that don't fully use their skills and knowledge.
It also found that median wages for holders of bachelor's degrees are down from 2000 and that the job prospects for bachelor's degree holders fell last year to the lowest level in more than a decade.
One of the few optimistic voices for the sector is that of Morningstar analyst Liang Feng, who, in writing about the prospects for the
Kaplan educational division, which generated $150 million in operating profits for the company last year, said that "for-profit colleges will ultimately recover from near-term challenges, but normalized enrollment, in our view, could easily fall to half of peak 2010 levels before rebounding."
That's because "demand for technical degrees has outpaced supply, and state governments have reacted very slowly to increasing demand for post-secondary vocational education," and that's not likely to change given their budget constrictions, said Feng.
Here are summaries of seven stocks of for-profit schools arranged in inverse order of market value:
Corinthian, with a market value of $315 million, is a for-profit education firm with more than 110,000 students and operates 118 schools, offering everything from diploma programs to master's degrees at locations in the U.S. and Canada.
Its shares are up 76% this year and have a three-year, average annual loss of 40%. Analysts give its shares one "buy" rating, 10 "holds," one "weak hold," and one "sell," according to a survey of analysts by S&P.
S&P, which has its shares rated "hold," says "steep loan defaults among its former students and the very high proportion of its students using the government's Title IV loans have put (it) at risk of not complying with government regulations, although (it) recently said it thinks its risks in these areas have been greatly reduced." It also said it thinks Corinthian's enrollment drop has bottomed.
Career Education Corp.
Career Education, with a market value of $464 million, offers everything from certificate programs to doctoral degrees and has over 100,000 enrolled students. It operates more than 90 campuses in the U.S. and other countries.
Its shares are down 13% this year and have a three-year, average annual loss of 32%. Analysts give its shares eight "holds" and five "weak holds," according to a survey of analysts by S&P.
S&P has its shares rated "sell," and says its greatest challenge is related to the discovery of improper job rates at some campuses, the concurrent resignation of its president and CEO, and its subsequent receipt of a letter from its accreditor asking it to present reasons why its accreditation should not be suspended. There has yet to be a ruling on that. It's due to release earnings May 1.
Strayer, with a market value of $1 billion, is a for-profit educator with 92 campuses in 21 states, and serves students in all 50 states and 30 countries through its online programs. It has a wide range of degree programs.
Its shares are down 12% this year and have a three-year, average annual loss of 20%. Analysts give its shares one "buy" rating, three "buy/holds," nine "holds," and one "weak hold," according to a survey of analysts by S&P.
Bridgepoint, with a market value of $1.1 billion, offers associate to doctoral degrees in the areas of business, education, psychology, social sciences, and health sciences. Although it has two campuses, one in Iowa and the other in Colorado, it serves about 99% of its roughly 87,000 students online.
Its shares are down 7.4% this year, but have a three-year, average annual return of 22%. Analysts give its shares two "buy" ratings, four "buy/holds," and four "holds," according to a survey of analysts by S&P.
For its current fiscal year, the company projected student growth this fiscal year of about 10% and has been impacted by the tougher government standards. Last year enrollments grew by 11% after growth of 45% in 2010 and 70% in 2009.
ITT Educational Services
ITT Educational, with a market value of $1.5 billion, is a for-profit post-secondary education provider serving more than 88,000 students at its ITT Technical Institute and Daniel Webster College. It has 126 campuses and four learning centers in 38 states.
Its shares are up 5% this year, but have a three-year, average annual decline of 17%. Analysts give its shares three "buy" ratings, two "buy/holds," nine "holds," and two "sells," according to a survey of analysts by S&P.
For fiscal 2012, analysts expect it will earn $7.96 per share, and earnings will decline 6% next year to $7.51 per share.
DeVry, with a market value of $2 billion, is a diversified for-profit education company offering undergraduate and graduate programs in business and technology fields, and health-care.
Its shares are down 16 % this year and have a three-year, average annual loss of 10%. Analysts give its shares six "buy" ratings, three "buy/holds," and nine "holds," according to a survey of analysts by S&P. For fiscal 2012, analysts estimate it will earn $3.52 per share and that earnings will decline 3% next year to $3.43 per share.
S&P has it rated "hold," saying that "recent regulatory matters and negative publicity about for-profit educators have started to hurt (its) new student enrollments (and those at nearly all of its peers), and we see this continuing for a while."
Apollo, with a market value of $4 billion, is one of the world's largest for-profit education companies, with 350,000 students enrolled in its University of Phoenix. The company offers classes online and at its learning centers in nearly 40 states and internationally.
Its shares are down 35% this year and have a three-year, average annual decline of 19%. Analysts give its shares three "buy" ratings, six "buy/holds," nine "holds," and one "weak hold," according to a survey of analysts by S&P.
S&P has a "sell" rating on its shares as it says it finds them "overvalued" given the regulatory pressures the company and the industry faces. S&P expects revenues to decline 13% this fiscal year (ending in August) and another 8% in fiscal 2013, following a 4% drop in fiscal 2011.
For fiscal 2012, analysts estimate it will earn $3.36 per share and that that will decline by 4% to $3.21 next year. The Yacktman fund owned 2.1% of its shares at the end of the first quarter, the largest of any mutual fund.
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