The popularity of e-books, online learning in the country, the launch of new technologies and prudent acquisitions for a wider global reach have been resulting in the multifaceted growth of the U.S. education industry. However, the companies in the Zacks Schools industry have been facing COVID-related challenges like higher advertising and marketing expenses along with costs pertaining to online education. That said, prudent cost management, persistent focus on driving profitability and strategic initiatives are expected to lend support to some prominent players in this industry like Grand Canyon Education, Inc. LOPE, Adtalem Global Education Inc. ATGE, Stride, Inc. LRN and Perdoceo Education Corporation PRDO. Also, for-profit education companies are forging corporate and community college partnerships to educate their workforce.
The Zacks Schools industry comprises for-profit education companies that offer undergraduate, graduate and specialized programs in finance, accounting, analytics, marketing, healthcare, business and technology. They are engaged in offering career-oriented programs in the fields of business and management, nursing, computer science, engineering, information systems and technology, project management, cybersecurity as well as criminal justice. The industry players also offer child-care services and career-oriented post-secondary courses. Some companies within the industry also provide yoga classes and yoga-related retail merchandise-integrated fitness classes, along with conducting workshops and teacher training programs.
3 Trends Shaping the Future of the Schools Industry
Rising Demand for Online Education: For-profit education stocks have been reaping benefits from the rise in the virtual delivery of education. As the world struggles to contain the virus spread, many for-profit education companies have undertaken initiatives to reach students who aspire to complete their courses as planned, with the help of various online education platforms. Also, classroom-type-education-providing companies are cashing in on the unprecedented surge in demand for online education.
Cost-Saving Efforts, Increasing Use of Technology & Introduction of More Programs: In order to boost profitability, school companies are resorting to aggressive cost-cutting through significant layoffs, campus closings and consolidations. Developments such as switching to online education programs, increasing the use of technology in education, more investments in education, and the regular introduction of programs and specializations should boost student outcomes. Tie-ups with different organizations to reduce exposure to Title IV funding, improve academic quality and retain students also bode well. Many for-profit education companies are investing in non-degree programs and designing programs specifically aimed at meeting the educational needs of working adults in targeted professions.
Higher Rates & COVID-19 Impact: The Federal Reserve’s hawkish stance, comprising a series of rate increases to combat inflation, is making a slew of debt offerings, including new mortgages, credit cards and some student loans, more expensive. Although federal student loans are doled out at a fixed rate, private loans come with variable rates that have been edging up.
The COVID-19 pandemic has caused a disruption in educational services. There are headwinds as inflationary pressures, a tight labor market and the ongoing supply-chain issues continue to impact business. The general economic slowdown has reduced the number of jobs available to graduates and resulted in lower salaries being offered in connection with the available employment, affecting the companies’ placements and persistence. Additionally, the slowdown may compel students to repay their loans, which could increase institutions’ student loan cohort default rates, ultimately bumping up bad debt expenses. Higher default rates may also adversely impact the industry players’ eligibility to participate in some Title IV programs, affecting the companies’ operations and financial condition.
Additionally, increased competition, higher expenses for advertising and various programs, and a shortage of skilled labor are concerning. Higher unemployment levels may prove detrimental to for-profit education companies.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Schools industry is a 16-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #103, which places it at the top 41% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates impressive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector & S&P 500
The Zacks Schools industry has outperformed the broader Zacks Consumer Discretionary sector and the Zacks S&P 500 composite over the past year.
The stocks in this industry have collectively gained 31.8% compared with the broader sector’s rise of 3.8%. Meanwhile, the S&P 500 has gained 4.6% in the said period.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing for-profit education stocks, the industry is currently trading at 21.7X versus the S&P 500’s 18.3X and the sector’s 17.8X.
Over the past five years, the industry has traded as high as 64.1X, as low as 14.1X and at a median of 31.8X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
4 School Stocks to Buy Now
Below, we have discussed four stocks from the industry that currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have solid growth potential. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stride: Headquartered in Herndon, VA, this technology-based education company has been gaining from higher enrollment, increases in revenue per enrollment, and Adult Learning growth. Consistent demand for online learning options has been benefiting Stride’s top line in recent times. Investments focused on improving user experience, enhancing teacher tools and strengthening student engagement also bode well. Apart from strong free cash generation and a robust cash position that provide financial flexibility to reinvest organically, its businesses pursue strategic disciplined acquisitions that drive growth.
Stride currently carries a Zacks Rank #1. The stock has gained 14.9% over the past year. LRN has seen an upward estimate revision for fiscal 2023 earnings to $2.82 per share from $2.51 over the past 30 days. The company’s earnings for fiscal 2023 are expected to grow 11.9%.
Price and Consensus: LRN
Adtalem Global Education: This Chicago, IL-based company is a leading healthcare educator that partners with many organizations to address future workforce needs with access to academic curriculums, certifications and training programs across the medical and healthcare industries. Despite the pandemic's adverse impact on enrollment growth, the company has been able to expand margins across the business owing to operational efficiency and the realization of cost synergies associated with the Walden integration. The company follows a strict cost-control routine, with special emphasis on controlling and escalating costs at some of its institutions. Also, tie-ups and collaboration with different organizations are allowing Adtalem to reduce exposure to Title IV funding. The company believes that its portfolio management approach and effective cost management will help drive sustainability in revenues and EPS growth over the long term.
ATGE, carrying a Zacks Rank #2, has seen an upward estimate revision for fiscal 2023 earnings to $4.15 per share from $4.10 over the past seven days. The stock has climbed 35.4% over the past year. This company’s earnings for fiscal 2023 are expected to grow 28.1%.
Price and Consensus: ATGE
Grand Canyon Education: This Phoenix, AZ-based company is an education services provider to colleges and universities in the United States and has developed key technological solutions, infrastructure and operational processes to deliver superior services in these areas on a large scale. The company has been benefiting from an increase in the Grand Canyon University (GCU) traditional campus enrollments and higher revenue per student. Also, the company has been working with GCU on two main strategies (B2B and the rollout of new and relevant programs) to offset the downturn in online enrollment.
Grand Canyon Education currently carries a Zacks Rank #2. The stock has gained 25.3% over the past year. LOPE has seen an upward estimate revision for 2023 earnings to $6.43 per share from $6.39 over the past seven days. This company’s earnings for 2023 are expected to register 7.9% growth from a year ago.
Price and Consensus: LOPE
Perdoceo Education: Headquartered in Schaumburg, IL, the company offers bachelor's, associate and non-degree programs in information technologies, visual communication and design technologies, business studies as well as culinary arts. The company’s focus on increased investments in technology and student-serving processes as well as the acquisition of California Southern University bodes well. Also, a meaningful improvement in student retention and engagement is expected to drive growth.
PRDO currently carries a Zacks Rank #2. The stock has gained 20% over the past year. PRDO has seen an upward estimate revision for 2023 earnings to $1.77 per share from $1.74 per share over the past seven days. The company’s earnings for 2023 are expected to register 8.6% growth from a year ago.
Price and Consensus: PRDO
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