A rebound in for-profit education? Not yet

Fri Jun 22, 2012 3:49pm EDT

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(Reuters) - A year ago, investors in the U.S. for-profit education industry saw the stocks trading at their life-lows and believed that things could not get any worse.

Unfortunately for them, they did.

And the future does not look good. It is uncertain at best, as higher student enrollments — the only thing that could push shares up — is nowhere on the horizon.

Stocks, which nearly halved between April 2010 and December 2011, have fallen 27 percent so far in 2012.

The upcoming earnings season, which begins on Monday when market leader Apollo Group Inc reports third-quarter results, is expected to reiterate this gloomy outlook.

"It is going to feel an awful lot like last quarter when nobody had any real idea on how to predict business," said Brandon Dobell, an education analyst with William Blair.

"That will probably carry through the second quarter (of the calendar year) and maybe even through the fall," he said.

Earnings per share for 15 for-profit colleges are expected to fall by about 35 percent in fiscal year 2012, according to Thomson Reuters StarMine data.

Recovery at Apollo has been volatile, with new enrollments growing only 1 percent in the last quarter, compared with the sharp improvement seen in the quarter before that.

A drop in enrollment, which began in 2010, was prompted by new federal rules that have forced colleges to change admission policies to focus more on student outcomes, such as placement rates and debt loads, rather than profits.

HITTING A TROUGH

Total enrollments — new sign-ups plus existing students — declined at 11 out of 15 publicly listed for-profit colleges last quarter.

Enrollments fell over 40 percent at some colleges over the last two years, and were expected to see a recovery from those low levels in 2012. But economic factors have played spoilsport.

Student debt in the United States crossed the $1-trillion mark for the first time recently. And prospective students are getting increasingly averse to the idea of taking out education loans, given the high unemployment rates.

Unemployment is even worse in the target population that the for-profits serve — minorities and lower-income students, said Robert Lytle, head of education practice at advisory firm Parthenon Group Said.

"There is reasonable amount of evidence to suggest that we are at, or approaching, the trough," Lytle said, adding that it was still difficult to predict a recovery.

Goldman Sachs' Brian Karimzad believes the for-profit sector will continue to see depressed enrollment trends for another 2-3 years, before returning to 5-percent-plus growth.

STOCK PICKS

While the sentiment across the industry is bad, there are a few companies which have weathered the storm better.

Bridgepoint Education Inc and Grand Canyon Education Inc are better placed due to cheaper tuition fees and lesser business and education courses, for which the enrollment declines are far worse.

American Public Education Inc is also doing well, helped by its military focus.

The bigger companies DeVry Inc, Strayer Education Inc and ITT Educational Services Inc, along with Apollo continue to suffer.

The expected earnings per share declines in 2012 range from 1.5 percent for American Public Education to almost 90 percent for Career Education Corp, based on StarMine's SmartEstimates that are weighted towards the more historically accurate analysts.

Apollo is expected to see a 32 percent fall according to these estimates.

Low valuations across the sector may lead to acquisitions, but the industry is not too optimistic.

"There is just too much negative press, too much uncertainty," said Piper Jaffray's Appert.

"The banks are reticent to lend to this industry due to the regulatory concerns."

He said the higher-education accrediting agencies would be cautious about approving the change of control that would be required in any M&A deal in the education space.

(Reporting by Megha Mandavia and A. Ananthalakshmi in Bangalore; Editing by Anthony Kurian and Joyjeet Das)

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