School shares rally on loan legislation
NEW YORK (Reuters) - Education company stocks, long battered by the credit crunch, rose on Thursday amid heightened institutional interest, a takeover rumor and a sense the federal government would ensure that students have access to loans.
"We've seen the bottom," said analyst Alex Paris, Jr. of Barrington Research. "The sell-off was overdone."
The share prices of for-profit education companies have taken a hit since the housing-led credit crunch infected the student loan industry. Lenders have raised credit standards, generating fears the classroom door would close altogether on high-risk student borrowers.
But on April 9, a congressional committee approved a bill its sponsors said would keep the loan money flowing by letting the U.S. Department of Education buy federally guaranteed student loans from lenders unable sell them.
The shares of ITT Educational Services Inc (ESI.N) and Corinthian Colleges Inc (COCO.O), for example, each rose about 10 percent intraday on the news, despite recent downgrades for both to "neutral" from Piper Jaffray analyst Mark Marostica on credit concerns.
"We feel this lower multiple more appropriately reflects the challenging lending environment," he wrote in a note to clients about ITT Educational, whose price target he also lowered to $56 from $77.
He lowered his price target for Corinthian to $8.50 from $13.
But investor optimism that lawmakers, especially in an election year, would act to keep higher education accessible trumped the downgrades, said Signal Hill analyst Trace Urdan.
"The backdrop here is the legislation," he said.
A rumor that rival education company Apollo Group Inc (APOL.O), parent company of the University of Phoenix, might bid for ITT Educational in the low $80 range also fueled the share price surge of the company and across the group, Urdan said.
"Any deal like that would be a huge boost in confidence for the group that management across the sector has faith in the long term prospects for the market and the business model," Urdan said.
Also, Goldman Sachs Asset Management took a 6.5 percent stake in ITT Educational, according to a filing with the U.S. Securities and Exchange Commission -- another factor behind the stock's rise, Urdan said.
Corinthian's shares rose alongside ITT Educational's because it, too, has been on the receiving end of significant institutional interest, Urdan said.
In February, the Washington Post Co (WPO.N) bought a 8.1 percent stake in Corinthian. And in March, T. Rowe Price Associates Inc increased its stake in Corinthian to 10.2 percent, or about 8.7 million shares, from 5.8 percent, or about 5 million shares, according to government filings.
"Value investors can see that the overall environment in the credit markets has pressured the stocks, but that's not going to last forever," Urdan said. "You've had the stocks pressured down to worst-case scenarios and that creates opportunity."
While the S&P education services index .GSPEDUS has lost about a third of its value so far this year, it has been up about 8.3 percent since mid-March compared with a 6.6 percent rise in the broad market S&P index.
Career Education Corp (CECO.O) shares closed up 3.7 percent at $16.65, DeVry Inc (DV.N) shares closed up 4.7 percent at $49.92 and the shares of Apollo closed up 2.9 percent at $48.88.
(Additional reporting by Kevin Drawbaugh in Washington; Editing by Andre Grenon)
