When the economy weakens and many lose their jobs, thousands head to colleges and universities to enhance their skills, train for new careers or otherwise make themselves more marketable when the economy turns back up.
During the current economic downturn, this scenario seems to be playing out, but with a twist: many who want to get an education are struggling because state coffers are empty, thus reducing the funding available to many public colleges. This makes it harder for students to get into colleges, and for those accepted, there are frequently fewer courses available for them to take.
In July of this year,The Washington Post wrote: "Hundreds of thousands of students are likely to be turned away from low-cost community colleges [two-year colleges] across the country over the next year because of funding cuts at the very time that record numbers of students are flocking to the open-admission schools." About 42% of all undergraduate students in the US are enrolled in community colleges; four-year colleges and universities are facing funding cuts just as community colleges are.
Increased demand at a time of decreased capacity means that colleges with room for students are likely to do well. I got to thinking about this and figured this counter-cyclical situation should benefit publicly-traded, for-profit institutions, which almost never turn away students. I found three that are graded highly by my Guru Strategies.
One is ITT Educational Services (ESI). In business since 1969, the company is known for its technology education. Its student body numbers 65,000, and it operates in 37 states. The Guru Strategy I base on Warren Buffett's investment approach thinks ITT is a smart buy at this time. The strategy likes that ITT is a major player among the for-profit educational companies, its earnings per share have increased in each of the past 10 years and earnings are expected to grow 17.0% per year in the future, based on the consensus among analysts of the company's estimated long term growth rate. Further, the company has $150 million in debt, with earnings for its most recent fiscal year of $241 million; this is not a lot of debt, given how much the company is earning. Return on equity for the past 10 years has been a robust 39.5%, while return on total capital is even better, at 44.6%. This strategy looks not just at the financial performance of a company, but how well the stock is priced. It does this by estimating the annual rate of return an investor can expect over the next decade. Using two different evaluation methods, the strategy averages the expected rate of return and wants this to be at least 15%. ITT proves itself a star pupil by having a projected return averaging 21.4% annually if purchased at the current price.
The Apollo Group (APOL), operator of the University of Phoenix, is another teacher's pet. The company says it is the largest private university in North America, with nearly 200 locations and 420,000 students. It offers everything from two-year degrees to doctorates, though the majority of students are enrolled in its well established bachelors and masters programs.
Two Guru Strategies, those based on the writings of Peter Lynch and Joel Greenblatt, give gold stars to Apollo. The stock's P/E is 14.7, and its growth rate, based on the average of its three, four and five year historical EPS growth rates, is 20.93%. When combined in Lynch's famous P/E/G ratio (P/E relative to growth), we get 0.70; a P/E/G of 1.0 is the maximum allowed. Apollo's P/E/G says you are paying a relatively modest amount for the company's growth. Another aspect of the company liked by the Lynch strategy is the company's debt: zero.
The Greenblatt strategy looks at two criteria, combines them in a ranking among all stocks in our database, and looks for stocks with very high rankings. One variable is earnings yield. Apollo's is 12.32%, which ranks it 171 among the stocks in our database. That's okay, but nothing too exciting. But the second variable, return on total capital, comes in at a sizzling 115.4%, which gives it a ranking of 19. That is exciting. Also exciting is the stock's final ranking, which combines these two variables: also 19. Of the thousands of stocks in our database, Apollo is ranked 19th by the Greenblatt strategy. That's good enough for graduation with honors.
The last company I will report on is Strayer Education (STRA). The company expects to have over 70 campuses by year-end, and currently has about 46,000 students, most of whom are enrolled in online courses. The Guru Strategy I base on Martin Zweig's writings likes Strayer. Revenue and earnings are growing at about the same pace, which this strategy looks for. It believes that for earnings to continue to grow over time, they must be supported by comparable or better sales growth and not just by cost cutting or other non-sales measures. Earnings and sales are both growing at a bit more than 20% annually. Also, EPS has grown in each of the past five years. And Strayer like Apollo operates without any debt.
For-profit education is in a strong position to take advantage of the current economic climate and the continuing need people have to upgrade their skills and add degrees to their resumes. ITT, Apollo and Strayer are star pupils with enviable report cards. If you want to study some stocks, these three are a good place to start.
Published by Globes [online], Israel business news - www.globes.co.il - on September 23, 2009
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