Over the past decade, when the market has been flat or slightly negative, for-profit educators have simply demolished the markets. Companies such as Apollo Group (Nasdaq: APOL), Strayer Education (Nasdaq: STRA), and Career Education (Nasdaq: CECO) have all seen 100%-plus gains.
Putting the smackdown
However, 2010 has not been kind to these for-profit institutions. The Department of Education has been eyeing student default rates at these sorts of companies, and has decided to penalize those organizations that have overwhelming default rates. Essentially, if a school has a loan repayment rate of below 35%, it could be ineligible for future federal aid (of which for-profit schools have become extremely dependent on). If its rate is between 35% and 45%, it falls into a gray area where restrictions could be placed upon it. If the school's repayment rate is above 45%, then it is considered acceptable and shouldn't face any scrutiny from the federal government.
Just to put this into perspective, Kaplan University, owned by Washington Post (NYSE: WPO), has a repayment rate of 28%, while University of Phoenix (owned by Apollo Group) has a repayment rate of 44%. Different locations of DeVry's (NYSE: DV) schools average about 40%, which would place them in the "warning" area.
This past Monday, Education Secretary Arne Duncan said that, "While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not. Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use. This is a disservice to students and taxpayers, and undermines the valuable work being done by the for-profit education industry as a whole."
If these companies can't stop burdening students with loans they cannot afford, they will soon find their enrollment numbers down and the pool of potential students much less than it has been in the past. I would not be surprised to see revised outlooks and lower projected revenues if companies like Strayer, which has a repayment rate close to 25% (according to hedge-fund manager Steve Eisman), can't boost that number in a hurry.
Getting cheap yet?
An index that contains 12 different educational stocks has fallen by about 12% so far this year while the general market has languished close to even. And many of these stocks, despite the uncertainty facing them, are starting to look pretty darn cheap. I'm not one to speculate on the future of political events and their effects on specific companies, but it seems as though the bad news may already be baked into many of these organizations. For instance, Apollo Group sports a price-to-earnings ratio of 12.5, DeVry has a P/E of 12, and Corinthian Colleges (Nasdaq: COCO) has a paltry P/E of just 3.5.
Think it's time to hop on the wagon and start scooping up some of the bigger names with higher repayment rates, or is this a sector to avoid all together?
Sound off in the comments below!
