Another Bruise in For-Profit Education Players (STRA, APOL, COCO, DV, EDMC)

Publicly traded for-profit college stocks have been on a two-year roller coaster ride that looked like it was sorting itself out early in June. At that time, the US Department of Education ruled that its “gainful employment” rule would not take effect until 2015, a surprise ruling because most observers were expecting the rule to take effect immediately.

That announcement was followed earlier this week by the inclusion of an increase in Pell grants under both Republican and Democratic debt-ceiling proposals. That also boosted the sector. But today’s earnings report from Strayer Education Inc. (NASDAQ: STRA) may have tossed a wrench into the works. Higher costs and lower enrollments are pummeling Strayer stocks, down about -13% in early trading. Shares in Apollo Group Inc. (NASDAQ: APOL), Corinthian Colleges, Inc. (NASDAQ: COCO), DeVry Inc. (NYSE: DV), and Education Management Corp. (NASDAQ: EDMC) are all trading lower this morning as well.

Strayer didn’t perform all that poorly. The company reported EPS of $2.53/share compared with a consensus estimate of $2.39. Revenue of $163.8 million failed to meet an estimate of $166 million however. Operating margin fell from 38.6% in the same period a year ago to 30.6% and enrollment fell 8.5% year-over-year. New-student enrollment fell -21% and global online enrollment fell -12%.

Strayer’s 52-week trading range is $113.25-$241.76, and the stock closed yesterday at $143.25, a drop of -41%. Following the Department of Education ruling in June, Goldman Sachs raised the company’s target price from $137 to $151. Strayer’s shares trading today at around $124.50.

Short selling has been a hallmark of the sector for a while, as hedge funds have been betting against the schools due to their students’ poor loan repayment records. Shorts hold about 32% of Corinthian College’s float and about 23% of Strayer’s.

The Department of Education has reported that 12% of all higher education students are enrolled in for-profit colleges, that these students receive 26% of all student loans, and that 46% of all loan dollars are in default. The defaults are in large part attributed to the fact that graduates have poor luck getting a job after they finish their program.

New enrollments are the key to profits here. As long as the schools keep bleeding students they will also continue to bleed revenue and profits.

Paul Ausick

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