For-Profit Colleges: Looking for Bottom as Enrollments Fall (APOL, STRA, EDMC, COCO, CECO, DV)

The University of Phoenix, owned by Apollo Group, Inc. (NASDAQ: APOL), reported first fiscal quarter revenue of $1.33 billion and EPS of $1.61, both higher than expectations of $1.26 billion in revenue and EPS of $1.35. The sector needed some good news following a report from Strayer Education Inc. (NASDAQ: STRA) that enrollment was down 20% sent sector for-profit schools’ stocks plunging.  Enrollments are declining, political pressure remains, and the for-profit college model is under severe pressure.  It is a hard sell, but after the for-profit education sector has been gutted it is fair to ask if there is now some value in those companies which can survive.

Despite its rosy quarterly report, Apollo noted that its new-student enrollment was down 42% from the same period a year ago. Enrollment in degree programs also declined 3.8% year-over-year. Apollo also noted in its conference call that it expects new-student enrollment declines in the second quarter “to be about the same as the first quarter,” according to Bloomberg. That’s the real story as far as the for-profits are concerned.

Strayer reports quarterly earnings on February 7th, and is expected to post EPS of $2.66 on revenue of $174 million. Education Management Corp. (NASDAQ: EDMC) reports February 9th, and is touted for EPS of $0.61 on revenue of $770 million. Corinthian Colleges, Inc. (NASDAQ: COCO) reports earnings January 31st, and is expected to post EPS of $0.22 on revenue of $476 million. Career Education Corp. (NASDAQ: CECO) reports February 17th, and is expected to show EPS of $0.78 on revenue of $552 million, while DeVry Inc. (NYSE: DV) reports January 25th, targeted for EPS of $1.19 on revenue of $549 million.

In its earnings release, Apollo attributed the enrollment decline to “the adverse impact on the admissions process arising from changes in the way admissions and other employees are evaluated and compensated, the full implementation of University Orientation as well as continued refinement of the Company’s marketing approaches.” The company’s CEO also said that Apollo “expect[s] increasing declines in total enrollment as we move through the year.” Not a good prognosis.

The for-profit schools can no longer pay admissions officers based on the number of students they enroll, which is causing the schools to hire more highly skilled admissions people who get higher salaries. The schools also offer required orientation programs and have gone to more aggressive marketing programs, like letting students attend classes for no charge for a while to evaluate the courses.

Strayer’s CEO blamed his school’s troubles on “important public policy commentators…as well as significant media who have questioned the efficacy of investor-funded education,” reports The Wall Street Journal.

The low graduation rates and the low loan repayment rates these schools report have nothing to do with their falling enrollments, right?  It is always hard to consider former growth mechanisms as value stocks and ‘value’ will depend upon how Apollo and its peers can hold up against the industry pressures.

It does seem odd that none of these for-profit education companies discuss the costs behind ‘non-profit’ universities.  If you have ever paid for university tuition, it doesn’t feel like it is not for profit. Still, calling a bottom in a political minefield is not an easy task and the verdict is still likely some time out from today.

Sometimes even bad news mixed with less-bad news can be taken as good news.  Apollo shares are up 12% at $40.25 in active trading against a 52-week range of $33.75 to $66.69.

Paul Ausick