Many have looked for the for-profit education industry to keep providing solid growth even in a recession. For-profit education stocks have customarily behaved somewhat counter-cyclically in the past, so some are betting that they'll continue doing well in the current environment.

But are any of their stocks worth buying at current price levels?

Company

Expected 5-Year EPS

Trailing P/E

Market cap (millions)

Apollo Group (NASDAQ:APOL)

17%

14.6

10,300

ITT Educational Services (NYSE:ESI)

17%

15.2

3,640

DeVry (NYSE:DV)

23%

22.4

3,380

Strayer Education (NASDAQ:STRA)

21%

35.7

3,050

Career Education (NASDAQ:CECO)

13%

30.5

2,050

Capella Education (NASDAQ:CPLA)

26%

34.9

1,080

Universal Technical Institute (NYSE:UTI)

20%

185.2

358

Source: Yahoo! Finance. Data as of July 28, 2009.
EPS = earnings per share. P/E = price-to-earnings ratio.

With unemployment on the rise, it's natural for people to seek out additional training and qualifications to distinguish themselves amid a sea of laid-off workers, and it follows that they'll send for-profit schools' revenues skyrocketing.

This is not your father's university
Compare these corporations to traditional universities, and you'll see why some of them are profit-making machines. Especially for those that offer online programs, once you pay the fixed costs of creating a curriculum and the technology to deliver it, every additional enrollment generates more profit.

Moreover, working adult students don't require big capital expenditures in old college standbys like dormitories, athletic programs, full-service cafeterias, and clinics. For-profit education companies can instead focus on building extremely economically efficient businesses.

Hey, you! Get off of my grounds.
In capitalizing on those trends, companies with online campuses have performed better than those that are locked into bricks-and-mortar classrooms. Look at the operating margins of these companies that caught on early and have been pushing online enrollments:

Company

Operating
Profit Margin
Most Recent Quarter

Operating
Profit Margin
2008

Operating
Profit Margin
2007

Operating
Profit Margin
2006

Strayer

38%

32%

31%

30%

ITT

35%

32%

28%

24%

Apollo

32%

24%

23%

26%

Capella

18%

15%

13%

10%

DeVry

18%

15%

11%

8%

Source: Yahoo! Finance.

Conversely, Career Education and Universal Tech have both experienced deterioration in their margins.

Universal Tech has been slow on the uptake, but is now catching on to the fact that a blended learning environment, which combines online and on-grounds instruction, works wonders on operating profits. The technical nature of its curricula, however, might complicate a full transition to an online format.

Career Education still has dormitories, cafeterias, and many of the amenities found in traditional universities, and that puts a lot of drag on its online revenues, which continue to grow. Accordingly, the company has deactivated a few of its less-lucrative physical campuses, but becoming as profitable as some of its peers could take some time.

Fiscal fitness
While some of these companies may be less profitable than others at the moment, you'd be amazed at the overall health of each of their balance sheets. ITT carries the most debt, with a debt-to-equity ratio of 0.70, but the next most debt-laden company here is DeVry, with a 0.15 debt-to-equity ratio. The others have zero. Meanwhile, all of them have healthy amounts of cash on their balance sheets.

In addition to having huge coffers of liquid assets, most of these companies also have strong, reliable cash flows that often exceed GAAP net income. In my eyes, every one of these companies passes its financial statement physical.

Head of the class
Except for Career Education and Universal Tech with their eroding margins, you could make a solid case for any of these companies as profitable going concerns. But the problem with that approach is that high earning power doesn't always coincide with good buying opportunities.

Company

Forward P/E

PEG

Universal Tech

24.5

2.78

Strayer

24.3

1.44

Capella

22.6

1.01

DeVry

16.3

0.90

Career Education

14.9

1.71

Apollo

13.0

0.97

ITT

10.6

0.73

Source: Yahoo! Finance. Data is current as of 7/28/2009.
P/E = price-to-earnings ratio. PEG = price/earnings-to-growth ratio.

Capella and Strayer are great companies, but they're a little too pricey to buy at the moment. I'd consider buying them if their earnings multiples came down 25% to 50%. Risk-averse investors should avoid Career Education and Universal Tech until they turn things around, but as speculative plays, there are definitely riskier bets out there.

DeVry, ITT, and Apollo are all solid, and attractively priced for appreciation. Just be aware that while DeVry is technically a bargain, having more than half of its equity on the line in goodwill might sting investors down the road.

Both Apollo and ITT trade at attractive multiples, and their profit margins aren't showing any signs of weakness. Although ITT is perhaps a bit cheaper, at these prices, I'd say both of them are valedictorians.

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Fool contributor Chris Jones attended a traditional university, but he owns shares of Apollo Group. Try any of our Foolish newsletters today, free for 30 days. Alas! Upon some starry height, The Gods of Excellence to please, this hand of mine will never smite The Motley Fool's disclosure policy.