Marking the start of a new school year, school bells are once again ringing. So now seems like a great time to turn our attention to education stocks. Fairly new opportunities for investors, for-profit education stocks, and online education stocks represent the dramatic shifts in the education landscape -- a complex one that has evolved way beyond the one-room schoolhouse.
Although for-profit businesses have received criticism for poor student performance and quality of education, the industry -- like any other -- should not to be completely dismissed because of some bad apples. In fact, the industry is still fairly young, and as it matures it has the potential to be profitable over the long term. So let's hit the books and take a look at some of the best opportunities for investors interested in education stocks.
An educational-solutions company at the head of its class
One cornerstone of the No Child Left Behind (NCLB) legislation was the requirement that educators implement evidence-based practices. Although the Common Core State Standards have eclipsed NCLB, the emphasis of evidence-based practice remains, which makes Cambium Learning Group (NASDAQ:ABCD) a valuable resource for educators and a compelling opportunity for investors.
More attractive than the 35 industry awards the company received in 2016, and numerous others in 2017, is that its products are sticky. Ask educators, and they'll tell you that schools don't change curricula capriciously, since implementing them requires significant time and money -- two things for which schools are always pressed. In addition, it's not sound instructional practice to continuously transition students from one curriculum to another. The high switching costs of changing curricula, consequently, represent a significant competitive advantage.
Over the past five years, the company has successfully transitioned from its legacy print-based products toward its higher-margin online subscription products. Whereas technology-enabled solutions accounted for only 35% of revenue in 2012, they accounted for 65% in 2016.
Management aspires to transition even more. In a recent investor presentation, it identified a technology-enabled bookings target of more than 80% over the next three to five years -- a long way from the 37% they accounted for in 2012. This should drive higher margins as well. Management, likewise, expects adjusted EBITDA margin to grow from 14% in 2012 to 32% to 35% over the same period.
To say that New Oriental Education (NYSE:EDU), the self-proclaimed largest provider of private educational services in China, is in the education business would be to pay it short shrift. In addition to language training for students from 5 years old to over 18, New Oriental provides test preparation for both Chinese and international students, operates private schools from preschool through secondary, and offers courses that lead to professional certification and skills training for young adults in China.
|Metric||FY 2017||FY 2016||FY 2015||3-Year Compound Annual Growth Rate|
|Revenue||$1.8 billion||$1.5 billion||$1.2 billion||13%|
|Operating income||$262 million||$199 million||$154 million||19%|
|Free cash flow||$519 million||$453 million||$319 million||18%|
From revenue of $136 million in fiscal 2007 to what will likely be revenue of $1.8 billion in fiscal 2017, New Oriental has experienced tremendous growth over the past 10 years. And numerous indicators suggest that the company's growth story is far from slowing down. For example, the company's K-12 after-school tutoring business -- its bread and butter, accounting for 55% of total revenue in fiscal 2017 -- recognized a whopping 44.2% year-over-year increase in revenue (if computed in yuan) in fiscal 2017.
According to management, the company's online and offline (O2O) integrated education system played a pivotal role in K-12 after-school tutoring business growth, so it should come as no surprise that the company is expanding the system into other offerings. In the company's most recent filing, management says it's "in the process of launching the O2O standardized teaching system for our overseas test preparation business, such as IELTS [International English Language Testing System], TOEFL [Test of English As a Foreign Language], and SAT programs, in some of the large cities in China."
Founded in 1949, Grand Canyon Education (NASDAQ:LOPE) offers students the option to pursue their studies online or through a traditional college experience at its 260-acre campus in Phoenix, where they can pursue over 200 graduate and undergraduate degree programs and certificates. Scholar-athletes haven't been forsaken; looking to boost school spirit, GCU recently transitioned to Division 1 athletics. Grand Canyon University emerged as a for-profit institution in 2004 in an attempt to transcend the financial hardships that plagued the university in the early 2000s.
Teachers aren't the only ones who deserve an apple on their desks at GCU: Administration also deserves recognition, proving its prowess in attracting students. Enrollment for students on campus increased more than 12% year over year to about 17,400 in 2016, while students pursuing online studies grew to more than 65,000 in 2016 -- a 9.1% increase over 2015. Looking ahead, administration expects the student body to grow even more in 2017, forecasting enrollment of students on campus to grow about 9% year over year and 6% to 8% for online students.
Over the next five to six years, management estimates that on-campus student enrollment will grow to 30,000. But that's not the only indication that Grand Canyon has the potential for more growth. On the Q4 2016 conference call, Brian Mueller, Grand Canyon's CEO, noted that there's interest in pursuing another standalone campus for the university -- something he recognizes as a potential endeavor, though not for several years.
Education in the 21st century has come a long way from chalkdust and blackboards. For many students, in fact, there's no physical school at all, as online education becomes more and more attractive. Cambium Learning Group clearly demonstrates this trend -- a trend that will help the company prosper as long as it can continue to grow its subscriber base. And in terms of for-profit educators New Oriental and Grand Canyon, investors will want to monitor student enrollment as a critical factor in ensuring their success.