BOSTON (TheStreet) -- Apollo Group (APOL), Strayer Education (STRA), Grand Canyon Education (LOPE) and DeVry (DV) are among U.S. for-profit education companies rallying as students returned to school this month.The gains suggest investors may have dumped the companies' shares too early during the summer, when the government proposed regulations that were seen as hurting the industry's booming earnings growth. The S&P 1500 Education Index, which tracks the industry, is up 11% this month through Tuesday, while the benchmark S&P 500 Index has risen 6.8%. Apollo, the largest company in the industry and parent of the University of Phoenix, has jumped 13% in September after losing half its value over the summer. Among other companies, Strayer Education is up 4.9%, Grand Canyon Education has climbed 10%, DeVry has risen 11% and ITT Educational Services ( ESI) has gained 6.4%. The industry index dove 34% from June through August, a retreat that began after President Obama's administration announced June 16 that it would seek regulations aimed at stanching for-profit schools' high rate of student-loan defaults and curbing their aggressive marketing practices. That was followed by a series of proposals to meet those objectives from the Department of Education, including one that would reduce schools' ability to make federal loans based on the rate of their students' loan defaults. Its "gainful employment" requirement would make school courses eligible for loans only if 45% of current and former students are repaying their loans and that the annual debt payments of graduates are no more than 10% of their income. Since as much as 90% of for-profit schools' revenue is tied to government loans, losing the right to offer them would be devastating to earnings. The Education Department also issued its calculations of student-loan-repayment rates for specific schools in August in an attempt to preview its suggested rules' potential impact. That also roiled shares since it showed that most companies are not in compliance. Each new wrinkle in the still-evolving story prompted analysts to trim share-price targets or make downgrades. For example, a Sept.7 Bank of America ( BAC) report calls for industry-wide earnings declines in 2011 and 2012 as companies adjust operations to meet new rules. It also forecasts industry earnings growth of 10% annually after that transition period when the new rules come into effect, a sharp reduction for a sector that has seen hyper-growth in earnings and investor returns. Apollo earned $598 million in fiscal 2009, up 25% from a year earlier. Its return on equity rose from 27% in 2000 to as much as 69% in 2006, according to Mariusz Skonieczny, writing for GuruFocus.com.
For now, the industry's investment prospects remain cloudy since the Education Department has to walk a fine line in its attempts at reform. Although critics have suggested that loose student-loan practices have created a scenario similar to that seen prior to the sub-prime mortgage bubble, the Obama administration has done much to emphasize post-secondary education's role in retraining workers to meet the demands of a changing economy. Although there will probably be some casualties due to reforms, what is clear is that the for-profit education industry is not going to go away since it now serves an estimated 12% of the nation's post-secondary students. And that number should continue to grow as budget cuts force public and non-profit schools to cut their educational offerings.
Readers Also Like: