Extra Credit Investing

Through the end of August, go back to school with The Motley Fool. You'll find more educational book reviews, stock analysis, and financial advice here.

Welcome back, class. Um, where is everyone?

I mean, I realize we've already gone down the list of publicly traded, for-profit education companies in "School's In for the Summer" and "Too Cool for School?" And yes, final exams are done. And yes again, we handed out the grades in yesterday's "Where the Cool Kids are Investing," so technically, you've done all your required reading by this point. But geez, doesn't anyone want to learn just for the sake of learning anymore?

No? It's all about the credits?

Very well. Then as your reward for showing up today, I'm going to discuss three "extra credit" investing opportunities in the education sector. Open up your notebooks, and uncap your pens.

You've met the chicken. Now meet the egg.
We spent the past three columns discussing the powerhouses of for-profit education -- the companies that provide educational alternatives to the traditional, not-for-profit community college and university system. We started with the most "academic" of the bunch, Apollo Group (NASDAQ:APOL), moved through the academic/technology hybrids like ITT Educational Services (NYSE:ESI), and ended up in the pure blue-collar domain of vo-tech master Universal Technical Institute (NYSE:UTI). Today, we take a step backwards and examine three companies that help students get into college in the first place.

Brains or bucks?
Exam Question from Existentialism 101: "If you can't get into Harvard or Yale with the brains the good Lord gave you, then what's the point of living?"

Answer: Ha ha. That was a trick question. If you're even considering going to either of those schools, then your parents are obviously loaded, and you can afford the best coaching money can buy. Fools, let me introduce you to the companies that will happily take your money in exchange for giving you back your dreams: Educate (NASDAQ:EEEE), Princeton Review (NASDAQ:REVU), and Washington Post (NYSE:WPO).

Educate
Educate acquired the Sylvan Learning System from for-profit educator Laureate Education (NASDAQ:LAUR) in 2003 and later proceeded to acquire complementary brand Hooked on Phonics early last year. The new and improved Educate tutors and provides other supplemental education services to children from pre-kindergarten through 12th grade. In all, it serves 320,000 students -- even more than those who study at the biggest of the post-secondary educators we looked at last week -- Apollo.

Educate's business is divided into three segments:

• Tutoring service Sylvan Learning Centers makes up 60% of the firm's revenues and includes 1,050 franchised and company-owned learning centers in the U.S., as well as 964 franchised and company-owned learning centers in Germany and Austria, operating under the Schulerhilfe brand name.
• Online Learning does the same thing, only via the Internet, and is insignificant in terms of revenue.
• Institutional Services (40% of revenues) provides tutoring, supplemental education services, and special-needs services in public and private schools under contract to government agencies.

Princeton Revue
As you might guess from the name, Princeton Revue had its roots in teaching "to the test" and helping students review what they already knew -- the hope being that students could thereby improve their scores on such well-known standardized admissions tests as the SAT (for undergraduate college), GMAT (for business), MCAT (for medicine), GRE (for graduate school), and LSAT (for law).

Test-prep services still make up two-thirds of Princeton's revenues today, but they're not all that Princeton has to offer. Its K-12 Services unit, much like Educate's "Institutional Services" division, helps primary and secondary schools improve students' test scores. This unit provides about 25% of Princeton's revenues. The remaining 9% of Princeton's business comes from "Admissions Services," where Princeton burns the candle at both ends: helping colleges attract applicants and counseling students on how to get admitted.

Princeton provided its services in 1,500 locations to 129,000 students in the last fiscal year. Its tutoring services are provided both on site and online. The firm also has a limited number of franchised offices.

Washington Post 's Kaplan unit
When you hear The Washington Post, you think "newspaper," right? If so, you may be surprised to learn that the company today is much more an education-services company than a newspaper. Education is by far the firm's largest business segment, contributing 40% of revenues and 31% of operating profits over the past 12 months. The company provides a number of educational services within this segment, known as Kaplan, which is itself further broken down into four subdivisions: test prep, higher education, professional, and Score!

The subdivisions that face off against Educate and Princeton are Kaplan's test-prep unit, within which Washington Post also includes a tutoring business, and Score!, which helps schools boost their students' test scores. It therefore competes with Educate's Institutional Services unit and Princeton's K-12 Services business. The test-prep unit maintains 161 "permanent centers" within the U.S. and abroad, within which it managed to serve 280,000 students last year -- 200,000 on-site and the rest online. And Score! serves another 80,000 students through 168 Score! centers.

But which one do we buy?
Ah, the eternal question. Sadly, my advice must be: "Don't buy any of them." I'll include the numbers on which I base this advice below, but they basically boil down to this: Educate looks considerably overvalued and generated no free cash flow in the past 12 months. Princeton neither earned a profit nor generated free cash flow. And even the venerable Washington Post -- profitable, free cash flow-positive, and basking in the aura of its Warren Buffett stake -- looks overvalued to this Fool.

While I'd hoped to be able to recommend at least one of these companies to you, after crunching the numbers, it turns out that you came back to class today "just for the sake of learning" after all. Hope the experience wasn't too painful.

Epilogue

Still hungry for a recommendation? Rich may have struck out today, but every month, Tom and David Gardner serve up two fresh stock picks in the Fool's flagship newsletter: Motley Fool Stock Advisor. Take a free trialof the newsletter, and you'll get instant access to both of their September stock picks.

Fool contributor Rich Smith does not own shares of any company named above. Fool's Honor.