The nation's largest for-profit education firm came out with earnings numbers this week, and investors didn't like them one bit. As a former teacher, I've railed against the industry for some time now. I've tried to be fair, recognizing that there might be a role for such schools to play.
However, I can't help but wonder whether this week's earnings signaled the beginning of the end for the industry as it does business now. Below I'll explain my reasoning, and at the end I'll offer up a few investment ideas that are much more solid than for-profit educators.
A quick look at earnings
By far the largest player in the industry is Apollo (Nasdaq: APOL ) and its University of Phoenix. Back in June of 2010, the company had a total enrollment of almost a half-million students. To put that in perspective, the combined undergraduate enrollment of all 12 schools in the Big Ten is roughly 370,000. So, for a time, Apollo's schools were larger than the entire Big Ten Conference.
Since then, enrollment in the school has shrunk by 31% to 328,000 students. Again, to put it in perspective, the loss of roughly 150,000 students is like three Ohio States evaporating over the course of two years.
This week, the school announced that it would close 115 locations across the United States -- roughly half of its locations stateside. It comes on the announcement of earnings shrinking 60% since last year on revenue that was 11% lower, enrollment that was down 14%, and new-student enrollment -- an important figure to spot trends -- that was also down 14%.
What's the deal with the decline?
In short, the recent boom in for-profit education stocks was fueled by easy government money, promises of opportunity that couldn't be guaranteed, management that was woefully out of touch with its clients, and misaligned values that made college recruiters seem more like predatory lenders than people who were genuinely interested in helping people get access to a quality college education.
In August of 2010, the threads of the industry started coming apart when officers from the Government Accountability Office visited the campuses of schools owned by Apollo, Corinthian Colleges (Nasdaq: COCO ) , The Washington Post (NYSE: WPO ) , and Education Management Corporation (Nasdaq: EDMC ) . The officers posed as prospective students, and during their visits, recruiters encouraged the "students" to lie on financial aid forms.
Since then, it has been revealed that several recruiters were motivated to lie because their commissions were based partly on how many students they could bring in. That practice has now been outlawed, and schools aren't able to keep as much of every dollar they bring in, nor are they able to attract nearly as many students.
There has to be a better way
When it comes to business and education, there's a precarious tightrope that needs to be walked. It's not as if a luxury good is being peddled that one could easily live without. The education these schools are pushing comes with the promise of an improved station in society. While that outlook may be fundamentally flawed, it leads many students into crushing debt that can't be lifted by filing for bankruptcy.
Recently, a wave of alternatives has been surfacing that might knock for-profit education -- as we know it, at least -- into obscurity. For starters, many large state universities have begun offering online-only classes that carry far more clout among employers for a lower cost than for-profit degrees.
Some for-profit schools are offering classes that don't require financial aid from the government and charge 0% APR with no hidden fees to students. This eliminates both the funding problem (money from the government) and the student-debt problem.
Probably most importantly, President Obama has focused on increasing the role affordable community colleges play in helping students get a college education.
Naysayers will point out that currently, for-profit schools might be a screaming deal. Bridgepoint Education (NYSE: BPI ) , for instance, now trades with an ultra-low PEG ratio of just 0.33. Those pundits may be right.
But for some, including me, there's something to be said for being proud of what you own. That is, after all, what being a shareholder makes you: a part-owner in a business. I can only make decisions for myself, but I have absolutely no interest in profiting from this industry.
While you can certainly make huge gains if one of these schools ends up surprising me, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.