As we know, shares of for-profit education companies suffered mightily in light of the crises and allegations regarding low-quality education, poor student outcomes, high-pressure salesmanship, ill-conceived lending, and eventual regulatory crackdowns. Some former industry mainstays have been shuttered. But times may change. It’s not just that Trump himself has regulation-cutting sentiments and has had past involvement in the business. It’s that this was always an important area calling for the solving of problems, not carpet bombing of the industry. So it may be worthwhile to look at some promising education stocks.

In this Thursday, Sept. 10. 2009 photo, Brenda Combs, now a doctorate student at Grand Canyon University and ambassador of inspiration and achievement for the school, smiles about her present but remembers her homeless and drug addicted past in Phoenix. (AP Photo/Ross D. Franklin)

Screen Selections

On Jan. 30, I presented a screen I created in response to the pro-everyman mega-trends I believe will take hold based on the themes discussed in President Trump’s inaugural speech. I don’t predict Trump will or won’t succeed. I do predict things will move John and Jane Doe’s way whether it’s done through the efforts of Trump, Congress or a whole bunch of new people voted in down the road in both branches of government. Of the 20 stocks I presented, two were in the area of for-profit education; DeVry Education Group (DV) and Grand Canyon Education (LOPE).

This “Business” Has to Work

My conviction regarding stocks like this lies in my belief that the business as a whole will work because it has to work, because it had darn well better work.

I don’t say this as an apologist for Trump University. In fact, before that former enterprise made big headlines, I went ballistic when my wife signed up for a free real-estate workshop offered by another outfit and I explained why she should run fast and run far from things like that (she listened and was a no-show).

Instead, I cite the January 14, 2017 issue of The Economist, which made “Lifelong learning” the week’s cover topic. In that edition’s Leader’s section, the magazine observed--correctly I believe--that the “classic model of education--a burst at the start and top-ups through company training--is breaking down.” No matter what one studies, no matter what skills one takes into the work force, no matter what dreams, aptitudes, etc. drive us, there is one thing we can be pretty sure of: It won’t get them through life, not even close.

The world evolves; that’s been much written about. Less widely discussed, but equally important, is that people evolve. Heck, I work today in a field I didn’t know existed when I got out of law school. No matter who we are, we all have to be students during our lives, and we will do that. And the education system will eventually have no choice but to evolve. I don’t know that the for-profit education companies, including the ones on which I’m focusing today, have all the answers. Nor am I even sure the MOOCs (massive online open courses) have it just right. But I do believe that the latter are at least closer than traditional public education and are at least moving in the right direction, albeit not always smoothly.

Reports of abuse among for-profit colleges have been plentiful, alarming and amply documented. But in contrast to the apparent views of some, I do not see this as a clarion call for destruction of the sector any more than early abuses in the manufacturing sector (filthy, unsafe conditions, onerous working hours, child labor, etc.) were a call for cancellation of the industrial revolution.

See problems. Fix problems. We’ve done that before. I think we’ll do it again with education. For investors, I’ll expand it a bit: See problems. Fix problems. Own shares of companies likely to be part of the solutions.

DeVry (DV) as Part of the Solution

Admittedly, it requires something of a gulp to type a heading like that given that DV is an established name in this area and, not surprisingly, has experienced legal issues and consequences, both in the legal-regulatory arena and in the marketplace. The good news, if you want to label it such, is that it hasn’t been nearly as severe here as with others, and the company remains in existence--not all can say that. Moreover, DV has settled with the FTC regarding some advertising practices.

There may still be potential bad headlines since DV believes it has some vulnerability under new regulations governing the relationship between student debt and earnings. But it does not appear to impact more than a small portion of the company’s offerings. The biggest challenges going forward for the new CEO who took the helm in 2016 may be in the marketplace, and to the extent image is reality, the classroom.

The company’s namesake DeVry institution competes directly with community colleges many of which are public and hence able to offer lower tuition than can DV. One might assume DV is for those who can’t get into community colleges. There is likely to be some truth to this, but not 100%. Community colleges, in many cases just a step above high school, often have schedules that reflect this sort of heritage. In other words, they may not be quite as able as an institution like DV to accommodate the varying “delivery” needs of non-traditional students (i.e. working-age adults). DV’s Caribbean-based medical and dental schools are in similar situations. And there is often an unfavorable image that can be associated with non-U.S. medical education.

I’m not able to say what’s true and what’s not with regard to education quality. Ultimately, though, an investment case for DV isn’t really based on what the business or company is today. It’s about where one thinks it will go. As explained above, I believe the field will change a lot. DV’s place in it may be influenced by its stature as a survivor and it’s has broad wings, evident  in how it has stretched beyond traditional community-college-type to other areas; medical and veterinary school, nursing school (an area of current strength), a Brazilian branch, and high-level test prep (via Becker, which provides test prep for the CPA exam).

LOPE is a completely different animal within the world of for-profit-education. It’s a regular university; with a campus (in Phoenix – and no it’s not THAT University of Phoenix), student activities and even NCAA athletics. It’s a Christian-themed university that started from a Baptist background but which has by now become interdenominational. I’m not sure, in today’s political climate, what kinds of associations pro or con that may have for some, but I suggest investors take this off the table and think of LOPE as a serious educational institution (there’s ample precedent of serious universities that have religion-based heritages).

Like many traditional colleges and universities, LOPE started out as a non-profit. And like too many, it experienced financial problems. Unlike many, it came out of its crisis by passing into the hands of private investors in 2004 and eventually into the public equity market.

Perhaps due to its more traditional higher-education heritage and history, LOPE has not gotten into the kinds of trouble that have plagued sector peers and its numbers reflect this. Table 1 provides a sample.

Table 1

It’s hard to argue with numbers like that. There are two reasons why I’m seeing LOPE as a future-oriented part of the solution, despite the fact that it’s already doing well and doesn’t have a crisis out of which it must climb.

One is its proficiency in delivery to non-traditional students (in addition to its base of traditional on-campus student body). This, I believe, will be critical and as an investor, I see here-and-now proficiency as a plus. That doesn’t mean delivery in 2027 will look the way it looks in 2017. But I do think an institution that’s already effective this way in 2017 is well positioned to be where it needs to be, or better, in 2027.

The other is an oddball thing that I’ll state through quotations I selected from management’s presentation at its most recent earning conference call:

“We had another great quarter. I want to again thank our faculty and staff for their incredible efforts. As many of you know, our long-term goals are to grow the university's enrollments by 6 to 8 percentage points per year, grow revenues by 8 to 9 percentage points per year, and grow margins by 20 to 40 basis points on an annual basis. The enrollment growth is a combination of online enrollments growing 6% to 7% and our traditional campus enrollments growing 10% to 12%.

Revenue growth will happen as a result of continued increases in retention levels and ground enrollment becoming a larger percentage of our or total enrollment. Ground revenue per student is larger because of room and board revenue. Our goal is to accomplish this without raising tuition and keeping student loan amounts as low as possible, which we have been highly successful at doing.”

Sounds like a regular business doesn’t it. Here’s another:

“First, we have been making tweaks to our advertising strategy. We continue to move away from Internet-lead purchases and towards more traditional forms of media that help build our brand and that strategy has been successful.

Second, we have rolled out over 40 new academic programs in the last two years and 8.2% of our new students have come from those new programs.”

Here’s one more:

“As we have discussed previously, we anticipated that our margin in the second and third quarters will decline on a year-over-year basis as the ground enrollment continues to grow as a percentage of our total enrollment as the majority of these students do not attend courses during the summer months, May through August. And a large percentage of our expenses to support those programs are fixed.

Instructional costs and services grew from $83.2 million in the third quarter of 2015 to $91.7 million in the third quarter of 2016, an increase of $8.5 million, or 10.3%. This increase is primarily due to the increase in the number of faculty and staff to support the increasing number of students attending the University. In addition, we continue to see an increase in occupancy costs, including depreciation and amortization as a result of us placing into service additional buildings to support the growing number of ground traditional students in the fall of 2016 and an increase in dues, fees and subscriptions, and other instructional supplies, primarily due to increased licensees' fees related to education resources and increase food costs associated with a higher number of residential students. As a percent of revenue, IC&S increased 60 basis points to 43.6% due to the factors described earlier.”

The details aren’t important. It’s a review of a quarter. Some things went well, other things, less so. Very ordinary.

What is important are the thought process and language. We’re not hearing about noble aspirations and missions (although this company, like all others, have them). We’re not hearing about traditions and legacies. We’re not hearing about things being done because, well, because. We are hearing a private sector management team thinking, acting, and talking like a private-sector management group that sees its role as profitably deploying resources.

That LOPE attracted an incoming class with an average GPA of 3.5 suggests prospective students are fine with what the company is doing. That LOPE’s graduates have a median debt to discretionary income ratio of 6.2 (regulators regard a score below 20 as passing) suggests students are getting good value. The numbers in Table 1 suggest shareholders ought to be pleased. So yes, I see LOPE as part of the solution to today’s education dilemmas.

Stock valuation, meanwhile, strikes me as more or less neutral. The Price/Sales and Price/Book ratios are high, but justified in terms of financial theory be the company’s high margins and high returns on equity respectively. P/E, meanwhile, is 18.6 times the estimate of current-fiscal-year EPS, versus industry and S&P medians of 21.6 and 17.1 respectively.