Morgan Stanley Analyst Sees Mergers And Acquisitions Picking Up In Education Stocks As Companies With Excess Cash On The Balance Sheet Will Pay To Cure 90/10 Violations

• On 4:42 pm EDT, Monday October 5, 2009

67 WALL STREET, New York - October 5, 2009 - The Wall Street Transcript has recently published its Education Report offering a timely review of the sector to serious investors and industry executives. This 57 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Management Teams -- Secular Trends -- Regulatory Concerns -- Focus on Quality -- Developing Postsecondary Education Programs -- Growth in Postsecondary Education -- Online Education -- International Students -- Student Funding -- Execution Risk -- Management Transition -- Acceleration of Enrollment Rates -- Return on Invested Capital -- Long Term Prospects -- Regulatory Uncertainty -- Valuation Levels -- Stafford Loans -- Earnings Growth -- Opporunity for Growth -- For-Profit Institutions -- Nontraditional Students -- Postsecondary Tuition -- Domestic Players -- Jobs Market -- Decline in Stock Prices -- Fundamental Trends -- Valuation Levels -- Postsecondary Education in China -- Global Education -- Growth Prospects

Companies include: SkillSoft plc (SKIL); Rosetta Stone Inc. (RST); American Public Education Inc. (APEI); Apollo Group Inc. (APOL); Bridgepoint Education Inc. (BPI); Career Education Corp. (CECO); Capella Education Co. (CPLA); DeVry Inc. (DV); ITT Education Services Inc. (ESI); Grand Canyon Education Inc. (LOPE); Strayer Education Inc. (STRA); Blackboard Inc. (BBBB) and Universal Technical Institute Inc. (UTI); Corinthian Colleges (COCO); Lincoln Educational Services (LINC); School Specialty (SCHS); New Oriental Education and Technology Group (EDU); Princeton Review (REVU)

In the following brief excerpt from just one of the 14 interviews in the 57 page report, a Morgan Stanley equity analyst discusses the outlook for the sector and for investors.

Suzanne Stein, an Analyst in Morgan Stanley's New York-based research group, covers education companies. Ms. Stein joined Morgan Stanley in 2004 after serving as a Vice President in equity research covering telecom services at Goldman Sachs. Prior to Goldman Sachs, she served as an Associate at Donaldson, Lufkin & Jenrette. Ms. Stein holds a dual degree in finance and communications from the Wharton School, and the College of Arts and Sciences of the University of Pennsylvania. She has an MBA from the University of Chicago.

TWST: What kind of M&A activity do you anticipate in the space during the next year or two?

Ms. Stein: I think it depends. A lot of these companies have a fair bit of cash sitting on their balance sheets. And asset prices have certainly come down, so I think that at least from that standpoint, there is more opportunity for M&A. And I often think that one of the things that could trigger some M&A is what's happening on 90/10. If companies are in violation of 90/10, they could do an acquisition to remedy that problem. That would be a kind of quick fix to a 90/10 problem. I think companies are also looking internationally, but I wouldn't be surprised really to see the level of M&A activity pick up just because asset prices have now come to level where I think people view them as more reasonable than they were, say, six months ago. But the problem is that M&A in this space historically has not been tremendously successful. If you look at companies that had done a lot of M&A, those were the companies that tended to have more regulatory problems. I think one of the lessons learned over the course of the last many years is that centralizing functions like compliance are very important for these companies, so that they don't run into some of these regulatory problems. And they are real problems.

TWST: In general, what is your advice to investors in this space? What's the right type of investor for these companies, and what are you telling people to do?

Ms. Stein: I think at this point, given that there is a such a gap in valuation, when you look at the high end and low end, and when I look at the issues facing the industry, there are some obvious company-specific issues that would make some of the lower-multiple names trade at a discount to some of the higher-multiple names. So the names that I am recommending at this point are ESI, DeVry, Apollo and APEI. And names that I think are overvalued are Strayer and Capella. And Strayer and Capella are really viewed as the high-quality names in the group. But my view is that the problems facing this group from a regulatory standpoint are industry problems, those are not company-specific problems. And I think if there is either a positive or negative development on the regulatory side, I think the lower-multiple names have less of a chance of declining and more of a chance of increasing than the higher-multiple names. So my general thesis on the group is really to sell quality, sell perceived quality because I don't think there is a rationale for names like Strayer and Capella to be trading at twice the multiple of Apollo and ESI. I get it that there should be a difference, so they should trade at a higher multiple. But maybe that's a 20% or 25% premium: It's not double the multiple of the group. So I see a lot of downside risk in those higher-multiple names here.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 57 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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