The Best Play in For-Profit Education

For the past three days, I've been going through the for-profit education sector. Having been a vocal critic of the industry in the past, I realized the need to look for quality in the industry. We have examined the major risk factors facing for-profits, which include:

  1. New student enrollment numbers.
  2. Adherence to federal funding guidelines.
  3. Student-loan default rates.

After sifting through the information, I've put together this nifty chart to help us synthesize all of the information. After going through what it means, I'll reveal my diamond in the rough.

For more information on how I arrived at these numbers, see the links to the previous articles in this series.

Don't waste your time
Apollo, ITT Tech, and Strayer may emerge as solid investments, but the risks involved are too high for my hard-earned money. Taking it a step further, I have serious doubts as to whether Corinthian Colleges will even be around five years from now, given its heavy reliance on federal funding and sky-high student-loan default rates.

Investment candidates
This leaves us with three candidates for our investment dollars. Though the fundamentals look solid for Education Management, Bridgepoint, and American Public, we wouldn't be very Foolish if we didn't look at the valuation for these three companies.

School

3-Year Earnings Growth Rate

P/E (TTM)

P/E (forward)

Short % of Float

Education Management 61% 12.4 14.0 12.5%
Bridgepoint 239% 7.8 7.7 81.4%
American Public 42% 27.5 19.4 8.4%

Three-year EPS growth from Capital IQ, all other information from Yahoo! Finance.

Second runner-up
It seems like Education Management just doesn't have the numbers to justify my investment dollars. It hasn't been publicly traded long enough to get a fix on how it can grow earnings, and the stock seems to be priced fairly given the company's prospects.

First runner-up
A quick look at Bridgepoint shows a company that is deeply misunderstood by Wall Street. An amazing 81% of shares available for trading, or the public float, are sold short. Part of that is because Warburg Pincus' private equity firm controls nearly two-thirds of the company. And Wall Street doesn't see much growth on the horizon, giving the stock a forward P/E of 7.7.

However, the runway for Bridgepoint's growth is enormous. Given the school's size and plans for expansion, I think Bridgepoint represents a great candidate for the short-to-mid-term investor. Clearly, some professional Fools agree, too, as it is an active recommendation by our Million Dollar Portfolio, Special Ops, and Hidden Gems newsletters.

My diamond in the rough
That being said, I'd rather take a decades-long view of the industry when making investment decisions. Surely, Bridgepoint will grow, but I'm not 100% clear how it'll sustain growth and avoid the problems that have fallen on the shoulders of all the other, more developed industry players.

When I look at American Public, I see a company that should still be prospering 20 years from now. First of all, its laser focus on the military community provides a key differentiator. As this military market share continues to expand, the company will benefit from having a group of focused students who get their money from outside Title IV funds. Defaults should continue to remain low as well, as its tuition costs are relatively cheap.  The icing on the cake is the fact that the company is expanding to civilian populations as well.

Interested in keeping up on the latest happenings in the for-profit education industry? Add these two companies to your watchlist and you'll always be in the know.

Fool contributor Brian Stoffel does not own shares in any of the companies mentioned.

Motley Fool Options has recommended a call spread position on Bridgepoint Education. The Fool owns shares of American Public Education and Bridgepoint Education, and holds a short position in Strayer Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (19)

Comments from our Foolish Readers

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 17, 2011, at 4:30 PM, p2i wrote:

    So you don't own any of these stocks. Which ones are you short? Analysis from a short is never great analysis. It's always one sided opinion.

  • Report this Comment On May 17, 2011, at 4:43 PM, TheDumbMoney wrote:

    FYI -- I would at least include DeVry in the initial anlaysis. Not to mention WaPo's Kaplan division.

  • Report this Comment On May 17, 2011, at 6:07 PM, xetn wrote:

    I think the following would be the best investments:

    http://www.lewrockwell.com/north/north975.html

    http://www.robinsoncurriculum.com/

    http://www.khanacademy.org/

    They have no or low cost and a huge upside.

  • Report this Comment On May 17, 2011, at 6:56 PM, jimmy4040 wrote:

    Bridepoint is not a solid company it is a finanical scam under investigation by several state attorney's offices and considered so by the Senator of it's home state!

    Disgraceful how an upstanding investment group like MF allows the continual promotion of this company.

  • Report this Comment On May 17, 2011, at 7:45 PM, p2i wrote:

    Bridgepoint a scam because Senator Harkin says so? Senator Harkin is a disgrace to Iowa. He's the McCarthyism witch hunter of our times.

  • Report this Comment On May 17, 2011, at 8:25 PM, TMFCheesehead wrote:

    @p2i-

    I'm not short any of the companies.

    Brian Stoffel

  • Report this Comment On May 18, 2011, at 5:06 AM, moore34 wrote:

    Out of the 10K - "Ashford University expects that the FSA will consider the findings and recommendations in the final audit report and engage in a dialog with the university prior to determining what, if any, action to take. If the FSA were to determine to assess a monetary liability or commence an action to limit, suspend or terminate the university's participation in Title IV programs, Ashford University would have an opportunity to contest the assessment or proposed action through a series of administrative proceedings, with the right to seek review of any final administrative action in the federal courts. Although we believe Ashford University operates in substantial compliance with Department regulations that are applicable to the areas under review, we cannot predict the ultimate extent of the potential liability or remedial actions, if any, that might result from the recommendations by the OIG in the final audit report."

  • Report this Comment On May 18, 2011, at 6:36 AM, moore34 wrote:

    "An amazing 81% of shares available for trading, or the public float, are sold short. Part of that is because Warburg Pincus' private equity firm controls nearly two-thirds of the company"

    Brian, how do you find out who has the biggest short position? I'd love to see that list....

    Good Article, Thanks!

  • Report this Comment On May 18, 2011, at 10:28 AM, jimmy4040 wrote:

    Brian:

    No comment on the active investigations of the company? No comment on the fact that it exists only to suck up student loan money and graduates, relatively speaking, no one?

  • Report this Comment On May 18, 2011, at 10:44 AM, jimmy4040 wrote:

    For a local non-financial reporter, this guy does an amazing job positively undressing Brdigepoint!

    http://www.voiceofsandiego.org/public_safety/pavement/articl...

    Any comment Brian?

  • Report this Comment On May 18, 2011, at 11:04 AM, TMFCheesehead wrote:

    @jimmy-

    I've read the story. There's very little in there that couldn't be said about the majority of for-profits out there. The buying-out of already-accredited schools is common practice (and I agree, it's horrible). The class-action lawsuits are pretty commonplace too (see EDMC). As for Harkin, I'm pretty sure he chose BPI because of their "official" location (Ashford) in Iowa.

    I don't think there's anything wrong with what you're saying, but I think you're missing the point that in my search for an investable idea, I evaluated three risk criteria. Going by those numbers, I came up with my results.

    Brian Stoffel

  • Report this Comment On May 18, 2011, at 11:16 AM, jimmy4040 wrote:

    Well you're man enough to respond, which other MF supporters of BE never do, so you get credit for that.

    We simply disagree that a business which is the educational equivalent of the sub-prime lending business of the 2000's is worthy of MF consdieration.

  • Report this Comment On May 18, 2011, at 3:17 PM, nickpohl wrote:

    How about avoiding the industry altogether? Education and the concept of for-profit tend to not mix for reasons that are worthy of an extended debate.

    Not to mention the active investigation of for profit universities in a dozen or so states.

    They're socially irresponsible and have done nothing to improve the economic outlook for most of the individuals who are now indebted them. Thumbs down.

  • Report this Comment On May 19, 2011, at 8:38 AM, moore34 wrote:

    I'm politically agnostic and when it comes to controversies try to remain unemotionally attached; This allows me to look at the high short interest on BPI as a contrarian opportunity.

    Check out my blog where I have posted three articles on BPI and its potential to surprise....

    http://bit.ly/jKtg8y

  • Report this Comment On May 19, 2011, at 9:50 AM, jimmy4040 wrote:

    The link doesn't work.

  • Report this Comment On May 20, 2011, at 1:49 PM, 1daveinva wrote:

    I'm with dumberthanafool...I would have at least included DeVry in the initial analysis.

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