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Unemployment Favoring For-Profit Schools


As more jobs dissolve, many seek additional education.

The summer is over, which means beaches are empty and classrooms are crowded. But it isn't just kids staring dull-eyed at the blackboard: Men and women across the country are also back in school, benefitng for-profit education companies.

This is a diverse sector encompassing a wide variety of different institutions such as DeVry (DV), Apollo Group (APOL), ITT Educational Services (ESI), Bridgepoint Education (BPI), Strayer Education (STRA), and Corinthian Colleges (COCO), to name just a few. Online or on campus, these schools teach a wide range of skills including health care, criminal justice, information technology, and construction trades.

Investors haven't been enthusiastic about the sector in recent months, but analysts covering the space argue that there are still reasons for optimism here: Specifically, the labor market is lousy, and some of these stocks are no longer looking as pricy.

During the market meltdown last year, the stocks of companies offering post-secondary education held up very nicely, notes James Maher, an analyst with ThinkEquity.

Investors considered them smart counter-cyclical plays: As the economy tanked, the assumption was that more Americans would enroll in school because they couldn't find work, or they would be looking to strengthen their resumes with more education.

And indeed, enrollment at some of these schools surged. DeVry, for instance, reported solid fourth-quarter and full-year results in August with new student starts and enrollment growth increasing at a double-digit rate for essentially all segments.

Compared with the same period last year, overall revenue increased 43% in the quarter and 34% for the year.

In late June, Apollo reported that its third-quarter profit jumped 45% as it enjoyed a sizable enrollment increase and a healthy gain in revenue.

But now, with all the cable news chatter of looming economic recovery, investors don't appear as enthralled with these education companies. Stock pickers are rotating out of a sector they consider defensive as they hunt for early cycle winners.

Over the past six months, for example, DeVry is up 16% as the broader market has rocketed up nearly 50%. (Over the same period, Apollo is up just 1% while ITT Educational Services is up 1.5%).

However, James Maher of ThinkEquity argues that, looking ahead, for-profit schools will continue to enjoy robust enrollment and new student starts. A weak job market will guarantee a continued sizable pool of unemployed men and women looking to head back to the classroom, he thinks.

"The recession may be ending, but unemployment isn't," Maher tells Minyanville. "That is a lagging indicator. Dig into the unemployment report, and you'll see that the unemployment rate is substantially higher for those people with just a high school diploma or some college. Those folks will continue to look to bring new skills to their job searches and careers."

Even to those economists that have predicted a return to positive growth in the second half of this year, last Friday's news on the August employment situation was worrisome.

Joseph LaVorgna, Deutsche Bank's chief US economist, who described the report as very disappointing, noted that the job market has now shrunk every month since January 2008.

The economist also pointed out that temp hiring, which tends to lead overall labor demand by anywhere from three to six months, suffered its 19th consecutive monthly decline.

There are some concerns when it comes to for-profit schools, analysts note, including credit market turmoil that has made private student loans more difficult for some students to obtain. Another worry: A weakening employment environment may affect job placement rates.

"We have seen some lower placement rates from a number of schools," says Maher. "But here is the other side of that: If you look at today's job market, which is very difficult, then what is your alternative? You can compete without a degree, or you can seek a degree, and at least have something more to offer."

In terms of specific stock picks in the sector, Maher likes the cash flows at Apollo. "They have been able to do significant share repurchases and, more importantly, they have been able to go out and do some acquisitions. It's still a growth story."

He also favors American Public Education (APEI), a smaller school that Maher believes is still in its early growth stages.

But what'll happen when this economy does eventually recover, and that spooky unemployment rate moderates? Even then, when better times do arrive, analysts argue that for-profit schools will benefit from a broader trend: a secular, long-term shift of Americans pursuing post-secondary education, says Morningstar analyst Todd Young.

"You might not see the huge growth rates we have seen over the last couple years, but there will still be solid, probably double-digit growth for most of these companies," Young tells us. "I think the long-term prospects for the industry are good no matter what the economy does."

Ariel Sokol, an analyst at Wedbush Morgan who covers the sector, also notes that some of these stocks are looking as cheap as ever right now. DeVry, for example, is now trading with a forward P/E multiple of 14 and a price-to-earnings growth ratio of 0.77. (Anything under one represents a potentially good deal).

Sokol is telling his clients to put money to work in Grand Canyon Education (LOPE). "They have a traditional ground campus in Arizona, and 50% of their students are graduate school students. They are focused on health care and education -- two areas that will have good growth rates regardless of what the economy does."
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