For-Profit Ed Goes To The Head Of The Class

Let’s face it: Limiting competition and driving up costs is a death sentence for any business, not to mention the fact that the ripple effect–regardless of the product or service–impacts all the other industries that depend on it. Why then, has the government proposed regulation that will limit growth and increase costs in the one sector that contributes to the success of every single industry in America?

I’m referring to higher education; specifically, to the for-profit universities that play an important role in our country’s economic recovery, growth and employment, while contributing to our competition and success in the international marketplace.

The for-profit education industry has been the center of some very recent heated legislative debates, thanks largely to the bad business practices of a few bad seeds. I am frankly disappointed and dismayed at the recruiting and marketing practices of many of these well-known and high-profile institutions. But that shouldn’t impact our opinion of the entire industry. To value-seeking investors, the beaten-down sector’s struggle with battered stock prices–as a result of their public flogging, a Washington witch-hunt and some recently revealed exploitative recruiting policies–offers attractive depressed valuations. With luck, upcoming legislation will punish unethical companies while maintaining room for well-intentioned innovation.

Many for-profit education companies have seen their stock prices fall more than 30% since Jan. 1; Corinthian Colleges, for one, has lost 65% of its value. But even with all this bad press, the for-profit education sector is full of robust profit margins and profitability. On Nov. 5, The Washington Post said its third-quarter net income more than tripled, helped by higher revenue from its Kaplan for-profit education division. Specifically, Kaplan reported operating income of $99.1 million for the quarter, up 115% from the $45.9 million figure of 2009’s third quarter.

Given the depressed valuations and the sustainable growth profile (even under the backdrop of the Department of Education’s newly released integrity rules), I have been combing the sector looking for the best of breed investment opportunity. My analysis and research has led me to American Public University System, a subsidiary of American Public Education.

The company has a compelling growth model, a clean balance sheet and upright business ethics. APUS was founded in 1991 by a former Marine Corps officer and instructor, James Etter, and SEC filings show that the company has operated with integrity that befits a former Marine. APUS originally focused on meeting the unique educational needs of our veterans and the military–a very mobile population with extended, irregular schedules and limited financial resources. Over time, the university has expanded its offerings in response to demand for post-military career preparation, and today their programs provide relevant and affordable distance learning to more than 77,000 working adults worldwide. As of Sept. 30, APUS’s enrollment had increased 31% year-over-year, while most of its competitors saw their student bodies contract.

Institutions like APUS are important because they play a less costly (but still high-quality) role in training and preparing our workforce. The company isn’t merely a diploma mill, and it doesn’t support high pressure recruitment tactics, as evidenced by the fact that most of their students are referrals. The education company boasts an unheard of annual retention rate of 93% annually, according to a report by US News and World Report.

"We try to find ways to build referrals through key influencers. We don’t have outbound call centers at all. We really rely on people to get the word either from friends or from our advertising message and call us," CEO Dr. Wallace E. Boston Jr. told me when asked about APUS’s marketing practices.

Additionally, I consider American Public University System a stock to buy because, unlike some of its competitors, its students don’t graduate with extreme debt. In fact, the average debt load for APUS students after four years is $7,000–about half of one year’s tuition at an average public university. All books and materials are included in the total cost of APUS?’s tuition, as well.

"The concept of providing an affordable, high-quality education is central to our mission," says Dr. Boston. "We have not increased our undergraduate tuition in almost 10 years, unlike some schools that regularly increase tuition to drive incremental revenue growth and margins." Even without tuition hikes, the company recently announced that third-quarter net income climbed 32% to $48.3 million, up from $36.5 million a year earlier.

APUS reaches an under-served market, and its online-only curriculum makes continuing education and lifelong learning more accessible to more people. There are growing pains in the online education industry just like any other, but the notion that government involvement in our education system will lead to its demise is unfounded. Arne Duncan, U.S. Secretary of Education, is modifying his approach to ensure gainful employment upon graduation and decrease burdensome college loans. Furthermore, he plans to no longer allow the Department of Education to dictate curriculum, which is good news for education entrepreneurs; less government intervention means more innovation.

It is ironic that the non-profit sector is still under attack by Wall Street short-sellers. In reality, the storm has passed but Wall Street hasn’t picked up on that yet. For-profit-education companies are quickly adjusting their programs to satisfy the Department of Education’s concerns and to forestall any significant legislative mandates that could derail their core operations.

For example, Kaplan just announced that it will allow students to register for classes and matriculate for four to five weeks before undertaking any monetary obligation. If a student has a change of heart, isn’t academically qualified or even fails an exam, he or she can walk away without paying. Many for-profit schools have followed similarly and have initiated programs that allow students to take a test drive before shouldering the burden of tuition and, consequently, onerous student loans.

Even still, Wall Street is trying to fight the inevitable–a sector that is here to stay and plays a pivotal role in educating and preparing our country’s young adults. The lack of confidence in this arena is evidenced by companies such as ITT Educational Services ( ESI – news – people ), which has a whopping 24% of their shares shorted. Corinthian has an even higher percentage shorted at 27%. Jim Chanos, a legendary short-seller, was especially vocal on the exploitative nature of for-profit education, but amends have been made and the most salient offenders have been brought to the forefront. When earnings deliver a positive surprise during the next quarterly reporting cycle, you will see these stocks soar as the longs re-initiate positions and the shorts scramble to cover theirs.

President Obama has said that he wants America to lead the world in producing college graduates by 2020. There is simply no way that can be done without new and more accessible education models to help deliver results. Some educational institutions have improperly taken advantage of this need, while others have served our communities with veracity and principled and ethical intentions. APUS serves our men and women in uniform and our veterans. It’s a for-profit institution that is, quite simply, doing it right. That will spell rewards for its shareholders.


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