School’s Out For Summer?

By most measures, U.S. colleges and universities are the still the best in the world.

The U.S. spends far more on higher education as a percentage of its gross domestic product than any other nation, according to a 2007 United Nations report .

And six of the world’s top 10 schools, led by Harvard, operate in the U.S., according to a widely followed ranking by U.K. research and consulting firm Quacquarelli Symonds.

But critics say that enviable position is eroding fast.

Many schools have cut spending across the board, according to a recent report in the Chronicle of Higher Education. And for many publicly funded universities, the recession has only deepened financial problems.

That has created an opening for commercial schools, which have jumped into that gap with new ideas and a razor-sharp focus on students’ educational goals.

Of the 20 million college students in the U.S., about 4 million — or 1 in 5 — attend for-profit schools like Phoenix’s Grand Canyon University, a 25,000-student private college run by Grand Canyon Education (LOPE), according to Brian Mueller, the company’s CEO.

"The contribution we make to adult higher education is significant, given that tax dollars don’t support us," Mueller said.

The fees students pay at commercial colleges are on par with community colleges and state universities, he says. And "the success rate of our students and their ability to get jobs is very strong," he added.

Grand Canyon was one of several private schools that froze or reduced tuition this academic year in a bid to attract recession-hit students.

Business
Grand Canyon is just one of 28 companies in IBD’s Commercial Services-Schools group.
State colleges and universities are funded and run by governments, and private universities like Harvard and Princeton enjoy multibillion-dollar endowments.

Commercial colleges and universities, by contrast, are privately operated and funded by Wall Street.

Some, like Capella Education (CPLA), operate solely online. Others, like Grand Canyon and Apollo Group (APOL), have a mix of online and on-campus classes.

While their programs vary, commercial schools tend to focus heavily on technical and vocational training or on enhancing existing careers.

The total number of for-profit degree-granting schools jumped from 345 in the 1995-96 school year to 1,043 in 2007-08, according to the U.S. Department of Education.

Wedbush Securities analyst Ariel Sokol says he’s impressed with Grand Canyon’s growth and stability.

"On a year-over-year basis, they are having tremendous revenue growth," Sokol said. Last quarter, sales jumped 52% to $84.4 million, and earnings soared 333% to 26 cents a share. Sokol rates Grand Canyon as outperform, or buy.

Grand Canyon has an IBD Composite Rating of 97 out of a possible 99. The Composite Rating evaluates stocks in five areas, with extra weight on earnings and stock price strength.

Others in the group with outstanding numbers include Capella (97 Composite Rating), Bridgepoint Education (BPI) (97) and Strayer Education (STRA) (93).

The largest company in the group is Apollo. It operates the University of Phoenix, which, as of the fourth quarter of 2009, had 443,000 students. Apollo reported $3.96 billion in sales in 2009.

Name Of The Game: Provide high-quality education at an affordable price. Beyond that, differentiate by building a strong brand name like Apollo’s well-known University of Phoenix.

Market
When the economy’s down, prospects for commercial schools pick up. People who’ve been laid off want to get back into the job market, and education can help open doors. Workers who still have jobs want to hone their skills to stay competitive.

Eduventures, an education research and consulting firm, says working adults and the unemployed are returning to school in record numbers. It predicts that the number of 30-and-older higher-education students will rise 14% from 2008 to 2016, to more than 5 million.

That’s twice the growth rate for 18- to 22-year-old students, a group that analysts expect to grow 7% in that period to 8.5 million.

Quality counts. Students look for schools that have a good reputation.

Grand Canyon ranks No. 7 on the Online Education Database’s 2009 list of the nation’s 44 top online schools.

ITT Technical Institute (ESI) came in at No. 18, Capella at No. 23 and Apollo’s University of Phoenix at No. 28.

Nova Southeastern University in Fort Lauderdale, Fla., topped the list.

Climate
Just like in the classroom, institutions that didn’t make the list of top schools are dragging down the curve for everybody. The commercial schools group as a whole has had so-so earnings and sales growth recently.

Although the worst-performing schools might seem like good takeover candidates, the industry has seen little merger activity.

"Over the last couple of years you have seen institutions buying or converting nonprofits to for-profits," Wedbush’s Sokol said. "But you’re not seeing consolidation among the publicly traded companies."

There are exceptions.

In July, Apollo bought U.K.-based BPP Holdings, formerly listed on the London Stock Exchange, for $607 million. The buyout points to a globalization trend, as noted in a January report from Eduventures.

"Today, internationalizing higher education … involves purchasing universities around the globe and stitching them together to form a network of institutions managed by a single corporate entity," the report said.

Technology
Colleges and universities continue to embrace computer technologies, both in the classroom and in the management suite.

"A lot of innovation occurs with how you get new students," Sokol said. "For example, schools are using CRM (customer relationship management) software to acquire new students."

Erickson says Capella uses computer simulation to teach students in its public service leadership track, a master’s degree program, how to deal with real-world situations.

She cited a public safety simulation of a bridge collapse in Minneapolis, where Capella has its headquarters. In the simulation, a student acts as city manager and two others simulate the roles of public safety officer and public health officer.

"How would the three city organizations work together?" Erickson said. "What do the city manager, and public safety and public health officers need to know? They can practice in terms of how they would interact with one another."

Students already use computers for all course work, she says. Simulations simply take that technology to the next level.

Outlook
Many economists forecast a long, slow economic recovery. Unemployment is likely to remain stubbornly high until at least next year.

That could be good news for commercial schools, which typically have more control over spending and cost controls than state schools and Ivy League universities.

At a time when students are a drain on state college budgets, they add to the bottom line for commercial schools.

Wedbush’s Sokol says the outlook for well-run schools like Grand Canyon "is very favorable" this year.

Eduventures Chief Research Officer Peter Stokes says that many schools experienced an increase in applications and saw their entering classes grow, even during the depths of the recession.

Looking ahead, Stokes warns that newer technologies like open courseware, which allows anyone, anywhere to see all course materials online, could disrupt traditional schools’ revenue models.

Stokes argues that "these disruptive innovations represent a threat to some portion of our colleges and universities in the not-too-distant future."

Upside: As American workers strive to get ahead in the global economy, they’re turning in record numbers to education to better themselves. That trend is likely to continue, no matter what shape the overall economy is in.

Risks: Many colleges and universities have frozen budgets, laid off workers and delayed new programs because of the weak economy. A further struggling economy could force spending cuts even closer to the bone. Diminished educational offerings could hurt sales and profits.

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