Education Stocks: 2011 Outlook

(Educations stocks' 2011 outlook report updated with DeVry and Capella Education quarterly results.)
NEW YORK ( TheStreet) -- Stocks in the education sector underperformed the S&P 500 last year for the second consecutive year. Performance in 2011 is expected to remain volatile amid regulatory uncertainty , but TheStreet takes a closer look at key industry players and how each is expected to perform.

The Department of Education is expected to unveil a final version of what is known as the "gainful employment" rule which would cut federal aid to schools with more than 65% of students unable to repay hefty loans. Federal aid to for-profit education providers came to nearly $150 billion in the last academic year.

RBC Capital Markets analyst Robert C. Wetenhall said he expects the final version "will be comparable to or less onerous than the previously published draft version." Still, he told TheStreet that it's "tough to get excited about the education sector's outlook" for 2011 given the lack of a hard catalyst, or "something dramatically material likely to provide torque to the stocks."


The Obama administration's proposed education regulations cover everything from restricting incentive-based recruiting practices, the need for new job-training courses, and taking action against schools which fail to advertise honestly to requiring schools to notify students of graduation and job placement rates . Institutions would also be required to limit student enrollment to those who have high school diplomas or can readily demonstrate their readiness for university-level education. Schools must also comply with what is called the 90:10 rule in fiscal 2012, a rule stipulating that no more than 90% of a for-profit education provider's revenue may be generated from the DOE's federal student aid program.

Bob Phillips, managing partner at Spectrum Management Group, told TheStreet "the general macro outlook for the sector is not good." He views the education sector as "a bubble fueled by free government money."

Citi analyst James Samford suggested investors "stick with the clicks," meaning schools that offer online postsecondary education programs as opposed to more traditional classroom and campus settings. He estimated that nearly a third of all students took at least one course online in 2010. Nearly half of students taking at least one online course, around 3 million, were taking programs exclusively online he said, a number he expects will grow to 5 million by 2015.

Samford also encouraged investors to consider schools with lower-priced programs. Even as the nationwide unemployment figure is expected to drop by 60 basis points this year, "sustained unemployment levels above 9% will continue to offset a complete tailwind reversal" that would normally affect school stocks during a recovery.

With all this in mind, here then is a rundown of 2011 expectations for each of the major education sector players.

Apollo Group

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Apollo Group ( APOL)

Return in 2010: -34.8%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $4.58 per share, or $670.5 million, compared with fiscal 2010 profits of $3.62 per share, or $553 million

Revenue Expectations for Fiscal 2011: $4.68 billion, compared with fiscal 2010 revenue of $4.93 billion

Fall 2010 Enrollment Market Share: 22%, or 440,000

Average Tuition: $21,900 for Associates, $66,196 for Bachelors and $27,318 for Graduates

Samford noted that Apollo, along with DeVry ( DV) and Corinthian Colleges ( COCO), offers relatively high tuition rates, presenting a competitive disadvantage to lower-priced peers like American Public Education ( APEI) and Bridgepoint Education ( BPI), when schools face regulatory hurdles.

Apollo's investment in a University Orientation program should help position the company well by the time the gainful employment rules take effect, Samford said. Apollo's orientation program is a free, three-week, non-credit bearing program that was made mandatory as of Nov. 1 for all new students enrolling at University of Phoenix with fewer than 24 transfer credits.

RBC's Wetenhall recently reiterated a sector perform rating on Apollo shares, lowering his price target by $5 to $40, noting that questions about enrollment growth will "limit enthusiasm" for the stock "until greater clarity emerges." He pointed out that management teams at Apollo were largely net sellers of the company's shares on the open market last year which "potentially suggests a lack of strong conviction in enrollment and earnings growth for the sector in the coming quarters."

Spectrum Management's Phillips said that Apollo has "the hardest time sustaining historical revenue increases" and is "heavily reliant on government aid for their students," leading him to suggest investors avoid the stock.

Apollo Group beat fiscal-first quarter profit and revenue expectations , driven largely by tuition price increases at Apollo's flagship University of Phoenix.

Wetenhall noted that "investors are starting to give Apollo credit for improving the quality of its business model, but remain cautious due to poor enrollment visibility."

Degreed enrollment at University of Phoenix declined 3.8% year-over-year. Lower enrollment was attributed to changes in the way admissions personnel were compensated for acquiring and registering students. New student enrollment at University of Phoenix fell 42% in Apollo's first quarter, a sharp reversal from growth of 14% in the year-earlier period. "Because of a large decline in new enrollments, coupled with the graduation of some of our existing student population, we expect increasing declines in total enrollment as we move through the year," CFO Brian Swartz said on a conference call with investors.

On Oct. 14, 2010 Apollo warned that enrollment would be down more than 40% in fiscal 2011's first and second quarters . Apollo withdrew its outlook and warned that it would fall out of compliance with the so-called 90:10 rule in fiscal 2012.

On March 29, 2011 Apollo's fiscal second-quarter adjusted quarterly profit topped expectations , but the company offered a soft student enrollment outlook for the University of Phoenix.

University of Phoenix degreed student enrollment decreased 11.6% to 405,300 in the recent fiscal second-quarter, compared with year-earlier results, primarily due to a 44.9% decrease in new degreed enrollment year-over-year.

Apollo also offered a weaker-than-expected long-term outlook.

Apollo forecast fiscal 2011 revenue in a range of $4.65 to $4.75 billion, with operating income, excluding the impact of special items, in the range of $1.15 to $1.20 billion.

For 2012, Apollo said net revenue would be in the range of $4 to $4.25 billion, with operating income, excluding the impact of special items, in the range of $675 to $800 million. Analysts' consensus was for 2012 revenue to come in at $4.51 billion with adjusted operating income of $1.03 billion.


Career Education

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Career Education ( CECO)

Return in 2010: -11.1%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $2.63 per share, or $220.6 million (Fiscal 2010 data to be reported on Feb. 17.)

Revenue Expectations for Fiscal 2011: $2.16 billion (Fiscal 2010 data to be reported on Feb. 17.)

Fall 2010 Enrollment Market Share: 6%, or 118,000

Average Tuition: $26,382 for Associates, $47,368 for Bachelors and $16,656 for Graduates

Citi's Samford said that revisions to the gainful employment rule could negatively impact Career Education by 40%, though some level of bearishness seems already priced into the stock. Based on his "bear case scenario," Career Education would trade within 4% of its historical average price-to-earnings ratio.

Career Education falls under what Samford calls the "bricks and clicks" category, meaning it offers a mix of classroom- and online-based educational programming. Indeed, Career Education operates around 90 campuses in the U.S., France, Italy and the U.K., though around 40% attend its Web-based virtual campuses of American InterContinental University, Colorado Technical University, International Academy of Design & Technology and Le Cordon Bleu College of Culinary Arts.

Samford cautioned investors that bricks-and-clicks stocks like Career Education are more volatile than their peers when sector news regarding the several regulatory issues still outstanding -- gainful employment, potential 90:10 legislation, accreditation agency scrutiny and draft cohort default rates -- top headlines, moving in a range of +/- 14-18% in the two week period surrounding regulatory announcements.

Wetenhall recently reiterated a sector perform rating on Career Education shares, raising his price target on the stock by $2 to $20, noting that questions about enrollment growth will "limit enthusiasm" for the stock "until greater clarity emerges."

He expects Career Education's overall enrollment to have ticked up 3% in its fiscal-fourth quarter 2010, year-over-year, underperforming his estimates for expected average sector enrollment growth of 7%.

Wetenhall forecast calendar 2011 revenue to grow 6%, EPS 3%, enrollment 2% and pricing 3%.

In November, Career Education said it was working to improve the quality of its student outcomes, but forecast lower student enrollment as it moves to alter some of its programs and recruiting practices, part of its effort to reduce student debt and boost graduation rates. The company also said it would not be able to meet its long-term 2011 targets, having forecast revenue growth of 8% to 10% between 2011 and 2014.


DeVry

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DeVry ( DV)

Return in 2010: -15.4%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $4.51 per share, or $322.5 million, compared with fiscal 2010 profits of $3.87 per share, or $279.9 million

Revenue Expectations for Fiscal 2011: $2.2 billion, compared with fiscal 2010 revenue of $1.92 billion

Fall 2010 Enrollment Market Share: 6%, or 112,000

Average Tuition: $34,532 for Associates, $57,048 for Bachelors and $19,362 for Graduates

Wetenhall tapped DeVry as his "best mid-cap growth idea," saying "we think that its diversified business model can sustain long-term EPS growth of 15%+."

Citi's Samford cautioned that revisions to the gainful employment rule could negatively impact DeVry, as with Career Education, by 40%, though some level of bearishness seems already priced into the stock. Based on his "bear case scenario," DeVry would trade within 4% of its historical average price-to-earnings ratio.

Samford expects enrollment at DeVry to increase 9% year-over-year in 2011. Still, DeVry offers relatively high tuition rates which present a competitive disadvantage for its performance "in 2011 and beyond, when for-profit schools will be facing regulatory hurdles," he noted.

An attractive segment in the education space this year is with schools that offer nursing programs, as DeVry does through its Chamberlain College of Nursing. Samford said schools should benefit from nursing student enrollment after U.S. nursing schools turned away nearly 55,000 qualified applicants in 2009 due to budget restraints and an insufficient number of faculties. The analyst noted that the Bureau of Labor Statistics has indicated upwards of 581,500 new registered nurse positions will be created through 2018, boosting the RN workforce by 22%.

"DeVry's Chamberlain College of Nursing...provides DV with advantages such as lower exposure to 90/10, since many nursing students tend to pay with cash or receive tuition reimbursements," Samford said. "Additionally, higher demand for nursing graduates ensures that these students contribute to high repayment rates and thus lower default rates. Chamberlain's 90/10 is 69% and the school has one of the lowest default rates at DV (2008 CDR of 1.7%) and a 2009 repayment rate of 49%." He expects Chamberlain College of Nursing enrollment growth of 38% in 2011 year-over-year to over 12,000 nursing students.

Wetenhall recently reiterated an outperform rating on DeVry shares but lowered his price target on the stock by $7 to $50. He expects enrollment in DeVry's programs to grow 17% this calendar year, EPS to grow 15% and revenue to grow 13% even as pricing should decrease 5%.

On Jan. 25 DeVry topped Wall Street's 2011 fiscal-second quarter earnings expectations with profits of $88.7 million , or $1.25 per share, on revenue of $551.5 million, though new student enrollment at its namesake DeVry University fell 4.7% in the quarter. Even so, total undergraduate enrollment rose 14.9% in the fall semester. At DeVry's Chamberlain College of Nursing, new student enrollment in the fall increased 42% and total students increased more than 58%, besting Samford's expectations.

On April 26 DeVry once again topped quarterly profit expectations despite softer student enrollment .

Earnings rose 14.4% year-over-year to $92.9 million, or $1.32 per share, on revenue of $562.7 million.

While DeVry's total student roster grew, new undergraduate enrollment at its namesake university dropped 15.4%; at its Ross University, new student enrollment fell 8.2%.


Education Management

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Education Management ( EDMC)

Return in 2010: -17.8%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $1.72 per share, or $244.9 million, compared with fiscal 2010 profits of $1.22 per share, or $168.5 million

Revenue Expectations for Fiscal 2011: $2.9 billion, compared with fiscal 2010 revenue of $2.51 billion

RBC's Wetenhall recently reiterated a sector perform rating on Education Management shares, maintaining a $15 price target. He believes that questions over EDMC's ability to remain within regulatory compliance will curb the stock's growth until a revised gainful employment rule -- and therefore, greater clarity about the future of the sector -- emerges.

Wetenhall expects EDMC to grow student enrollment by 4% this year, slightly outpacing his overall sector estimate for student enrollment to decline 2% year-over-year.

Revenue should grow around 11%, he said, and EDMC could raise its prices by 7%. The analyst expects EPS to grow by double-digit percentages to $1.89, a full 17 cents ahead of the consensus call.

"We would not be surprised to see reported results that differ materially from consensus estimates due to the difficulty of estimating the collective impact of slowing enrollment growth, operating margin compression and share buybacks on EPS," he noted, explaining why his forecast differed materially from the Street's call.

Samford expects Education Management to earn $1.73 in 2011, a penny above the consensus call.

In December EDMC increased the size of its stock repurchase program by 300% , from $50 million to $150 million, and extended the term of the program to Dec. 31, 2011.

Also in December EDMC said its subsidiary, Stauzenberger College Education , which owns Brown Mackie College locations in Louisville and Hopkinsville, Ky., as well as another location in Ohio, received a subpoena from the Office of Consumer Protection of the Attorney General of the Commonwealth of Kentucky for documents and details about its business practices.


Corinthian Colleges

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Corinthian Colleges ( COCO)

Return in 2010: -62.2%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: 91 cents per share, or $88.5 million, compared with fiscal 2010 profits of $1.65 per share, or $146 million

Revenue Expectations for Fiscal 2011: $1.92 billion, compared with fiscal 2010 revenue of $1.76 billion

Fall 2010 Enrollment Market Share: 6%, or 114,000

Average Tuition: $30,295 for Associates, $60,376 for Bachelors and $18,113 for Graduates

RBC's Wetenhall upgraded Corinthian by two notches to outperform , from underperform, and lifted his price target by a dollar to $6. The analyst said the return of its former CEO Jack Massimino would help turnaround the company. He called the Everest Colleges parent "speculative but worth the risk" based on recent management changes, and said "excessively low investor expectations" will lead Corinthian to outperform. "We expect that Mr. Massimino will leverage his experience in running public companies in the health care and for-profit education sectors to develop a rehabilitation plan for COCO that stabilizes enrollment and addresses its perilous regulatory position," Wetenhall said after a meeting with Massimino in early January.

Earlier that week, however, Barclays Capital analysts downgraded Corinthian shares to underweight from equal weight, lowering their price target by a dollar to $3.

Indeed, Wetenhall outlined several investment risks surrounding Corinthian. He cautioned that enrollment could decline on counter-cyclical headwinds and adverse publicity. In other words, college enrollment tends to increase when unemployment is high. As the labor market improves, albeit slowly, the situation could reverse and adversely affect for-profit schools. The analyst said that operating margins could contract as a result of negative sales leverage and rising student acquisition costs. He also noted that revised gainful employment regulations could curb Corithian's enrollment and profitability. Wetenhall forecast Corinthian will report a 38% decline in year-over-year enrollment in 2011.

Citi's Samford said that, in his bear case scenario, the a revised gainful employment rule could reduce Corinthian's 2012 earnings by more than 40%. He also noted that Corinthian's share price was "notably the most volatile" in 2010, swinging from -11% to +8% on the day of any material announcement, and swinging in a 2-week range of -21% to +24%.

On Nov. 30 Corinthian's then-CEO Peter Waller resigned after less than two years on the job . He resigned from both the CEO post and as a member of its board of directors.

On Feb. 1 Corinthian beat top- and bottom-line expectations for its 2011 fiscal second quarter but forecast slower student enrollment growth and said it plans to raise tuition fees and trim its workforce. Corinthian booked adjusted quarterly profits of $19.1 million, or 23 cents per share. It took $206.0 million in impairment, facility closing and severance charges in the recent quarter. Unadjusted for those one-time items, Corinthian booked net losses of $163.7 million, or $1.94 loss per share.

Total student population grew 13.3% year-over-year to 105,498, as of Dec. 31, but on a pro forma basis, including the Heald student population, the company's total student roster decreased 0.5%. Corinthian completed its acquisition of Heald Capital, the parent company of Heald College, in January of 2010. Total new students decreased 8% to 26,831. On a pro forma basis, new student growth declined 17.7%.

Corinthian forecast fiscal-third quarter revenue in a range between $462 million and $472 million, with earnings-per-share in a range of 20 cents to 22 cents. It also said new student growth should decline between 15% and 17%.

On March 17 Corinthian revised its student enrollment forecast , saying it now expects new student enrollment growth to decline between 21% and 23% in the third quarter of fiscal 2011.

Corinthian attributed its revised guidance to recently instituted tuition price increases for diploma programs, which went into effect on Feb. 1.

Student enrollment growth declines will also be a result of Corinthian's discontinuation of enrolling ability-to-benefit (ATB) students, the company said. ATB students refer to those applicants who do not already possess a high school diploma. Corinthian stopped admitting those applicants in Sept., 2010, as it worked to improve its cohort default rates.

Corinthian now estimates its average two-year cohort default rate will be between 9% and 12% for the 2010 cohort of students, down from its average preliminary CDR of 21.9% for 2009 and 19% for 2008.


Grand Canyon Education

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Grand Canyon Education ( LOPE)

Return in 2010: 3.1%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $1.36 per share, or $63.2 million (Fiscal 2010 data to be reported on Feb. 18)

Revenue Expectations for Fiscal 2011: $501.8 million (Fiscal 2010 data to be reported on Feb. 18)

Fall 2010 Enrollment Market Share: 2%, or 42,000

Average Tuition: $52,190 for Bachelors and $24,533 for Graduates

Wetenhall tapped Grand Canyon among his best investment ideas for the sector, citing expectations for 25% earnings-per-share growth and minimal regulatory exposure. He maintained an outperform rating on the stock and raised his price target by a dollar to $22.

He expects Grand Canyon enrollment to grow 22% this year, far outpacing his sector outlook for a 2% decline in year-over-year enrollment. Wetenhall expects revenue to jump 30% in 2011, and EPS to grow 25% to $1.40.

Samford said Grand Canyon, along with Bridgepoint Education and American Public Education, will benefit from offering relatively lower-priced programs as regulators and potential students pressure schools "to take a closer look at value proposition."

Grand Canyon was among Samford's top education stock picks based on his view that it is among those best positioned "from a regulatory, macro, and secular online growth perspective." He said Grand Canyon should be among the least impacted by changing regulations.

Grand Canyon focuses on educating working adults; most of its programs are online only though it has a traditional campus in Phoenix and does on-site education at the facilities of employers.

Samford reiterated a buy rating and $25 price target, citing "LOPE's focus on working adults pursuing online Masters or higher degrees (>40% of total enrollment) in high demand Education and Healthcare fields."

He said LOPE has relatively low regulatory concerns regarding the gainful employment rule, with low default rates and high loan repayment rates. Its traditional (campus-based) liberal arts college, which accounts for around 10% of its total enrollment, "provides the company with some insulation from 90/10 (higher cash payments) and represents a key advantage from a marketing perspective (lower incentive compensation risk)."

Still, Samford cautioned that LOPE could report margin compression of around 200 basis points to 25% this year, attributable to operational and marketing inefficiencies. He expects margin expansion to return in 2012 on scale advantages and improving retention rates.

The analyst added that LOPE's "highly regarded nursing program" should help drive demand.


ITT Educational Services

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ITT Educational Services ( ESI)

Return in 2010: -33.6%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $10.14 per share, or $300.1 million, compared with year-earlier profits of $11.17 per share, or $374.2 million

Revenue Expectations for Fiscal 2011: $1.52 billion, compared with year-earlier revenue of $1.6 billion

Fall 2010 Enrollment Market Share: 4%, or 88,000

Average Tuition: $40,000 for Associates, $80,000 for Bachelors and $26,198 for Graduates

Citi's Samford noted that ITT Educational Services, which offers the highest-priced educational programs among its peers, will face tailwinds as regulators and consumers pressure schools to examine their value proposition. Gainful employment rules could hurt its earnings by 40%.

ITT is among the more volatile education stocks, with a share price that swings as much as +/- 14-18% in a two week period surrounding regulatory announcements. Furthermore, "ESI has the most debt-to-discretionary income exposure in the group given its high percent of Associate students (85%), and an estimated debt-to-discretionary ratio of 40%," Samford said.

RBC's Wetenhall reiterated a sector perform rating on ESI, but lowered his price target on the stock by $1 to $64, citing concerns about the school's regulatory compliance. He expects ESI to report a 10% decline in year-over-year enrollment in 2011. The analyst expects revenue to fall 5%, and EPS to fall 3% to $11.50.

The operator of ITT Technical Institute and Daniel Webster Colleges said in October its new student enrollment fell for the first time in several years. ITT Educational Services offers its students 125 locations, including 121 campuses and four learning sites, in 38 states. It acquired Daniel Webster College in June of 2009.

Following ITT's better-than-expected 2010 fourth-quarter earnings report, Barrington Research analyst Alexander Paris maintained an outperform rating on ESI shares and lifted his price target by $5 to $80, but he lowered his revenue and earnings-per-share expectations for 2011. The analyst now expects ITT to book full-year earnings of $9.15 per share, down from his prior estimate for $12.20, and expects 2011 revenue to come in at $1.47 billion, down from $1.74 billion.

Deutsche Bank analysts lifted their price target on ITT shares by $25 to $75, maintaining a hold rating on the stock. Analysts from RBC Captial Markets also raised their price target on ITT, from $64 to $76, and set a sector perform rating on the stock. Zacks Investment Research, meanwhile, downgraded ITT to underperform, from neutral.

While total enrollment grew, new enrollments fell 9.4% in the October-December quarter, compared with a 3.9% decline in the prior quarter, and the school cautioned that enrollments would continue to drop in coming quarters.

ITT forecast 2011 EPS of $10.50 and said profit margins will decline as student enrollments drop.

Barrington's Parris noted that while "management has been relatively quiet on the issue of gainful employment, especially with the potential significant impact to earnings, we were encouraged that management decided to include an estimate (although we're still unclear as to what extent it is included) of its impact in their 2011 guidance," underscoring that "guidance provides a slight relief of uncertainty surrounding gainful employment risks."


Strayer Education

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Strayer Education ( STRA)

Return in 2010: -28.4%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $9.19 per share, or $125.9 million (Fiscal 2010 data to be reported on Feb. 7)

Revenue Expectations for Fiscal 2011: $676.5 million (Fiscal 2010 data to be reported on Feb. 7)

In early January Strayer said new student enrollments across its campus and online education system decreased by 20% for the 2011 winter term , which began Jan. 3, even as continuing student enrollments increased by 10%. It also said 2011 EPS could drop to a range of $7.50 to $7.70 if student enrollment falls 5%. If student enrollment rises 13%, EPS could come in at $11.30 to $11.50 per share, a forecast it laid out in its October earnings report.

That led Piper Jaffray analyst Peter P. Appert to slash his price target on Strayer by $17 to $119, maintaining a neutral rating on the stock.

RBC's Wetenhall recently reiterated a sector perform rating on STRA shares, lifting his price target by $30 to $155, though he cautioned that questions about its ability to remain compliant with new regulations will keep a lid on enthusiasm for the stock.

He expects Strayer to post enrollment growth of 13% in 2011, while revenue will jump 18% year-over-year. The analyst's EPS estimate is for 18% growth to $11.40.

While a number of its education peers have been criticized for utilizing incentive-based recruiting practices, Strayer Education never paid incentive compensation to its recruiting staff, according to Wetenhall's research.

Still, he expects Strayer to increase its marketing spending by 24% this year to $146 million.

On Jan. 26 analysts from Zacks Investment Research downgraded Strayer to underperform and listed the education stock as "Bear of the Day."


Bridgepoint Education

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Bridgepoint Education ( BPI)

Return in 2010: 26.5%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $2.54 per share, or $148 million, compared with 2010 earnings of $127.6 million, or $2.14 per share.

Revenue Expectations for Fiscal 2011: $871.3 million, compared with 2010 revenue of $713.2 million.

Fall 2010 Enrollment Market Share: 4%, or 77,000

Average Tuition: $22,692 for Associates, $44,640 for Bachelors and $18,902 for Graduates

Bridgepoint was among the best-performing for-profit education stocks in 2010, and the school operator should face less of a negative impact from new regulations because its students pay their loans back at a better rate than many of its peers.

Wetenhall noted that concerns about Bridgepoint's enrollment growth limits his "enthusiasm" for the stock. He maintained a sector perform rating on Bridgepoint and raised his price target by $1 to $18. He forecast that Bridgepoint will grow student enrollment by 12% this year, and will book revenue growth of 24%. The analyst expects EPS to spike 30% to $2.65, more than a dime ahead of consensus estimates.

Citi's Samford said Bridgepoint benefits from offering lower-priced programs both online and at its traditional campuses in Clinton, Iowa, and Colorado Springs, Colo. (As of Dec. 31, 2009, 99% of its students attended classes online.) He noted that Bridgepoint is among the least volatile education stocks, along with American Public Education, Capella Education and Grand Canyon Education, when regulatory news tops headlines. The analyst also said Bridgepoint is among those with the lowest exposure to gainful employment rules, primarily because of its low tuition rates and high repayment rates.

Bridgepoint would only need to lower its tuition by a single-digit percentage to be in compliance with the gainful employment rule's expected debt-to-earnings component, Samford calculated. With a weighted repayment rate of 45.2%, it is already in compliance with the repayment rate minimum necessary to be eligible for federal aid money.

On March 1, Bridgepoint beat fourth-quarter profit expectations and said it expects student enrollment to grow nearly 6% this year despite uncertainty in the for-profit education sector .

Bridgepoint said the impact of regulatory changes scheduled to take effect during the year as well as internal quality initiatives it introduced in 2010 will pressure the postsecondary education provider, particularly in the second half of 2011, yet it expects positive full-year new enrollment growth.

Total student enrollment jumped more than 45% to 77,892 in 2010, compared with 2009, and Bridgepoint anticipates its student roster will grow to between 81,000 and 82,500 in 2011.

Bridgepoint offered 2011 guidance based on the assumption of a 5% tuition increase for online students at Ashford University and University of the Rockies, all of its undergraduate and graduate degree programs, which are set to go into effect for courses beginning on or after April 1.

Bridgepoint's financial outlook was somewhat disappointing however, coming in shy of Wall Street's expectations. The school operator forecast 2011 earnings between $129.5 million and $131.8 million, or between $2.18 and $2.22 per share, on revenue in a range of $870.0 million and $885.0 million.


Capella Education

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Capella Education ( CPLA)

Return in 2010: -11.6%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $4.08 per share, or $68.2 million (Fiscal 2010 data to be reported on Feb. 15)

Revenue Expectations for Fiscal 2011: $471.8 million (Fiscal 2010 data to be reported on Feb. 15)

Fall 2010 Enrollment Market Share: 2%, or 39,000

Average Tuition: $54,874 for Bachelors and $18,769 for Graduates

Citi's Samford tapped Capella Education as one of his top picks in the education sector. He modestly raised his EPS estimates for 2011 and 2012, citing macro/regulatory positioning, high percentage of graduate mix and the potential for former-military students to help boost enrollment growth.

Samford said schools should benefit from military students as military benefits increased 120% year-over-year to $3.2 billion in fiscal 2010. "We have long viewed CPLA as a core holding in the Educational Services sector given its high quality advanced degree Online program offerings, and the companies focus on quality over growth has served it well from a business and a regulatory perspective," Samford noted. "Increasing competition in CPLA's target market is expected to translate into slowing enrollment growth relative to some of its online peers, but we continue to expect the company to generate double digit revenue and earnings growth over the next several years."

The analyst said he liked CPLA because of its high quality advanced degree concentration (80% of its students are Masters or higher). He also liked that its "business model is flexible enough to adapt to this changing macro, competitive and regulatory environment" and that its valuation is still reasonable given its long-term growth prospects.

Samford expects CPLA to benefit from a corporate recovery this year and next, and an expected reinstatement of tuition reimbursement programs among large corporations -- a practice many gave up amid the recession. "While we recognize that new student growth is likely to slow down due to competition for high quality leads, we believe CPLA's high persistence rates (average quarterly persistence rates in the high 80% range) can sustain double digit total enrollment through 2012," he concluded.

RBC's Wetenhall downgraded shares of Capella Education to sector perform, from outperform, citing questions about enrollment growth, but he raised his price target by $2 to $67. Still, he forecast Capella to post enrollment growth of 7% in 2011. He expects revenue to grow 8% on a 1% uptick in pricing. EPS should increase 15% to $4.15, Samford estimated.

On Feb. 15 Capella posted weaker-than-expected fourth-quarter earnings, announced layoffs and forecast a sharp drop in new student enrollment .

New enrollment growth dropped 10.7% year-over-year in the fourth quarter and Capella forecast new student enrollment to decline in the current quarter by 35% year-over-year.

On April 26 Capella topped quarterly profit expectations despite softer student enrollment .

Capella earned an adjusted 97 cents per share last quarter, up from 83 cents per share earned a year earlier. Revenue increased 10.1% to $111.4 million, from $101.2 million.

New student enrollment plummeted 35.8%, and it forecast that new student starts would be down 40% in the fiscal second quarter as the impact of increased competition and recent measures instituted to remain in compliance with new Department of Education regulations pressure enrollment standards.


American Public Education

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American Public Education ( APEI)

Return in 2010: 8.4%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $1.89 per share, or $35.6 million (Fiscal 2010 data to be reported on Feb. 17)

Revenue Expectations for Fiscal 2011: $240.9 million (Fiscal 2010 data to be reported on Feb. 17)

Fall 2010 Enrollment Market Share: 4%, or 78,000

Average Tuition: $15.250 for Associates, $30,250 for Bachelors and $10,800 for Graduates

Wetenhall tapped American Public Education among his top picks in the education sector, citing his view that APEI could outperform if military student enrollment grows with soldiers returning earlier-than-expected from the wars in Iraq and Afghanistan.

He upgraded APEI shares to outperform, from sector perform, and raised his price target on the stock by $10 to $40. The analyst expects APEI to grow student enrollment by 10% this year, and raise tuition prices by 4%. That should boost revenue by 14% and EPS by 23% to $1.90, he estimated.

Samford said APEI should benefit from offering lower-priced programs, and also picked APEI among his top picks for the sector. "The setup is most clearly positive for APEI given its diverse, low priced online programs and military concentration," he noted.

Samford raised his EPS expectations for APEI for both 2011 and 2012, and said APEI has the lowest EPS downside risk regarding gainful employment rules.

"What we believe sets APEI apart from the other online schools in our coverage group is APEI's military concentration, low tuition rates (lowest in our coverage group), and a rapidly growing civilian student population. APEI is very well positioned from a regulatory perspective given its low default rates, and the company's commitment to low tuition and low debt rates (APEI has not raised undergrad tuition for nearly a decade)," Samford noted. "We like the company's recent strategy of building its reputation in protective services and civilian markets."

He raised his 2011 and 2012 earnings forecasts by 2% and 5%, respectively, "to reflect the company's strategic low-price positioning (right for the times), limited regulatory risk (particularly Gainful Employment), increasing benefit from returning military forces, and marketing efficiency benefit from recently signed Post-9/11 GI Bill which provides a housing stipend to students who enroll in online programs."

"There is anecdotal evidence that students were not signing up to online programs because of the lack of a housing stipend," Samford continued. "While online students will not receive the full amount of housing stipend, we believe this eliminates yet another barrier for Online programs, and a positive for APEI in particular."


-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

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