Here Are 2 Diamonds In the Rough

I've never been a fan of for-profit education.

As a former teacher in a low-income district of Washington, D.C., I've seen students led astray by the industry. Once-promising college careers can disintegrate into wasted educations and a mountain of debt.

Starting with a scathing undercover report from the Government Accountability Office in 2010, investors haven't been fans either.

Does the sector deserve a second look?
And yet despite this, I can't deny the necessity to open up as many viable roads to a college education as possible. Currently, only 30% of U.S adults over the age of 25 have a bachelor's degree. If the nation is ever to accomplish President Barack Obama's goal of having the highest college graduation rate in the world, the for-profit industry will need to play a role.  

With this in mind, today will be the first in a series looking for quality players within the industry. Each day, I will focus on a specific risk factor facing for-profit schools. These factors include:

  1. Changes in new-student enrollment.
  2. Adherence to the government's funding rules.
  3. Student-loan defaults.

Stick around for the whole series and see what quality for-profit companies are worth investing in.

Schools behaving badly
In August 2010, the GAO released findings from an undercover investigation into for-profit schools. GAO officers posed as prospective students and recorded their interactions with employees of for-profit schools. The investigation included visits to branches of:

  • Apollo Group's (Nasdaq: APOL  ) University of Phoenix
  • Corinthian College's (Nasdaq: COCO  ) Everest College
  • Washington Post's Kaplan
  • Education Management's (Nasdaq: EDMC  ) Argosy University

In several of the clips, students were encouraged to lie about their financial standing in order to qualify for government aid. Furthermore, it was revealed that some recruitment officers were paid on commission, adding an extra incentive to mislead prospective students. Since then, the Obama administration has introduced new guidelines to prevent this practice.

These guidelines have changed the way some industry players go about their business, and that has had a serious impact on enrollments. The following chart shows how new student enrollment numbers changed year-over-year at the end of 2010 for some industry players.

School

New-student change

Apollo (42%)
Strayer (Nasdaq: STRA  ) (20%)
ITT Education (NYSE: ESI  )  (9%)
Corinthian Colleges (8%)
Education Management  16%
American Public Education (Nasdaq: APEI  )  20%
Bridgepoint Education (NYSE: BPI  )  47%

In the penalty box
Apollo, the parent organization for the University of Phoenix, faces astounding declines in its enrollment. At its height, Apollo was enrolling close to half a million students! If the current 40% haircut continues -- and management expects it will for at least the next few quarters -- Apollo is looking at an enormous defection of students ... and revenue.

In a move that does not bode well for investors in Strayer, CEO Robert Silberman blamed a 20% drop in enrollment on ... the media. Instead of addressing concerns about enrollment, graduation rates, or loan defaults, he stated that bad press was responsible for the drop in enrollment.

ITT Education and Corinthian Colleges also showed declines, but not nearly as much as the previous two.

Still growing
And at first glance, it would appear that Education Management is growing at a healthy clip. Their just-released enrollment figures for 2011, however, show that growth has slowed significantly, and looks to continue doing so.

That leaves us with two more candidates. Bridgepoint operates two schools: Ashford University and University of the Rockies. While they haven't traditionally been overly discriminating in choosing their student base, a recent decision to zero in on growth through corporate and military channels has definitely helped Bridgepoint.

American Public, founded by retired Marine Corps Maj. James Etter in 1991, focuses on providing an education to our men and women in the armed forces. Currently, two-thirds of the officers in the forces are without a graduate degree. That, combined with the fact that American Public only has a 12% market share from the armed forces and that it is currently pursuing civilians as well, shows why their student body continues to grow. It's also worth mentioning that while many of the above mentioned schools have grown primarily through questionable recruiting practices, American Public has grown primarily through referrals from students and alumni.

But that's not all
Just because Bridgepoint and American Public show promising enrollment numbers doesn't mean that they're ultimately good buys. Conversely, shrinking enrollment alone doesn't exclude the rest of our contenders.

Over the coming days, we'll be focusing on two more risk factors to consider before investing in for-profit education. In the mean time, sound off in the comments section below to let your thoughts be heard. We are a better Foolish community when we take a variety of opinions into consideration.

Fool contributor Brian Stoffel does not own shares in any of the companies mentioned in this article. Motley Fool Options has recommended a call spread position on Bridgepoint Education. The Fool owns shares of American Public Education, Bridgepoint Education, and Strayer Education.

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Read/Post Comments (1) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 12, 2011, at 11:35 AM, moore34 wrote:

    Department officials assume that adoption of the gainful employment proposals will keep existing rules at the current level until July 2012 date. Also, schools have already started to adopt to the rules already. See my 2 blog posts @ BPI http://bit.ly/ieeUZW

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