Low Enrollment Means Tough Times for These Education Companies

Private education companies in the U.S. continue to show sluggish enrollment growth levels due to students' aversion to debt, robust competition, and a volatile economy. Many institutions are still showing poor results, which makes it tough for them to attract investors' attention. Let's see how Apollo Group (NASDAQ: APOL  ) , American Public Education (NASDAQ: APEI  ) , and Strayer Education (NASDAQ: STRA  ) are performing and if they will offer any opportunities for investment any time soon.

Still struggling
Third-quarter results were not good for Strayer. Revenue dropped 11% year-over-year to $110 million, while net income decreased 23% to $3.1 million, driven primarily by lower enrollment, which dropped 17% to 43,192.

Strayer's primary source of revenue is student enrollment and since enrollment has been dropping since 2010 this has been raising concerns. However, the institution announced a bold restructuring plan that includes a 20% headcount reduction, the closure of 20 sites, and big cuts in tuition fees. The idea behind this plan is to reduce costs and, of course, improve the institution's profitability.

Nonetheless, continued unemployment, the overall economic downturn, and the subsequent decline in student demand are not helping Strayer improve its enrollment. Mid-career professionals -- Strayer's main target -- are reluctant to go back to school due to the difficult market environment.

Affected by the shutdown
American Public's third-quarter earnings grew 1.7%, driven by 6% revenue growth and better enrollment trends. Net course registration improved 2% year-over-year, which is alright. However, the company's fourth-quarter guidance expects significant declines in earnings, revenue, and enrollment.

The temporary suspension of the U.S. Department of Defense, or DoD, Tuition Assistance program as a result of the government shutdown in October affected enrollment count for American Public and we will see this taking effect next quarter. The company itself stated

American Public Education anticipates fourth quarter 2013 net course registrations by new students to decline between -9% and -5% year-over-year; net course registrations to decline -7% and -3% year-over-year; and revenues to decrease between approximately -9% and -5% over the prior year period.

This is not good news. Nonetheless it is probably temporary, and the institution should get back on track. Fundamentals are on American Public's side, as it is one of the leading providers of education to the military. Its online courses have been specifically designed to cater to this audience. Watch out though, as these DoD programs accounted for 37% of revenue this last quarter.

Expanding internationally
First-quarter 2014 results for Apollo were not satisfactory either, as net revenue dropped 22% year-over-year to $856.3 million. Enrollment from degreed University of Phoenix students dropped 17.7%, while new degreed enrollment decreased 22.9%. Pretty hard to swallow.

Unfortunately, Apollo's attempt to right-size its business through layoffs and campus closings has not yet proven successful. Apollo lowered fixed costs by $350 million in fiscal 2013, but if enrollment does not grow it will be hard for the company to see good earnings levels.

However, the institution is making some progress internationally. Its recent acquisition of Open Colleges Australia for $145 million including future contingent payments will help Apollo position itself as the leader in online learning in Australia. Plus, Apollo's investments in adaptive learning, curriculum development, new learning systems, and student service platforms should improve offerings and increase retention rates.

Final thesis
Despite its restructuring plan, Strayer's weak enrollment figures still raise concern. Consider this indicator before starting a position in this stock.

American Public will suffer in the following quarters until it recovers from the government program suspension. So, you might want to stay away from this stock until the institution's main indicators correct.

Apollo is still adjusting and it might require some more time until its restructuring and new student value propositions finally drive better results. Nonetheless, it is a good long-term stock to own.

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Louie Grint

I am a curious economist who likes to investigate what is behind asset price movements across the globe. My articles range from industry analysis of various sectors to understanding global macro events that could trigger volatility in the markets.

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