It’s back to school time, so let’s take a look at education stocks. The macro backdrop facing the sector is mixed. The slow growth economy and relatively weak labor market put a premium on education, and should raise the need for training, certification, and a degree. However, high education costs and fears over student loan debt are headwinds for the sector. Further, there is regulatory uncertainty as politicians focus on the value of education and attempt to protect students from debt burdens and paying for a poor result.
The New York Fed indicated that student loan debt rose $8 bln in the quarter ending June 2013 to a total of $994 bln. Debt is on the path of tripling since the first quarter of 2005 when it stood at $363 bln. The 90 day delinquency rate was down 0.3% in the quarter to 10.9%. The delinquency rate has eased recently, but remains in a longer term uptrend. The New York Fed said the average student loan balance was about $24,800 at the end of 2012.
The high level of debt and extreme cost of education is causing politicians to tie funding for some state colleges to student earnings. Massachusetts has done so with community colleges and Organ Senator Merkley is reportedly going to introduce a bill to link state funding to student earnings.
HR 1911 was recently passed and links the student loan interest rate to 10 year treasury yield with an 8.25% cap. The recent rise in rates will bolster the cost of loans.
Maybe a positive trend starting:
Capella Education (CPLA) was recently approved by the Department of Education for a competency based degree. The program focusses on learning as opposed to meeting credit hour standards. Other universities are applying for similar status. This movement may help to reduce the cost of education and drive enrollment. Devry (DV) is looking to be approved for competency based degree programs.
The table following displays the valuation of a select group of publically traded education companies. Just because a stock looks cheap or expensive is not a sole reason to invest or avoid, but the table provides a look at relative value in the sector and helps to flush out the story.
ITT Education Services (ESI) holds the cheapest valuation. It is priced with the lowest PEG ratio and 12 month forward price to earnings ratio, and the second lowest price to sales ratio. It is also trading at a discount to its 10 year median PEG ratio of 1.34.
Capella Education looks like the most expensive with the biggest PEG ratio and highest 12 month forward price to earnings ratio. Its price to sales ratio is the second largest. The market is paying up for its competency based program offering. Capella’s median PEG ratio is 0.90.
Earnings estimate revisions:
The next table displays the Zacks Rank, the trend in earnings revisions over the past thirty days, and the level of earnings per share for the current and next fiscal years.
The Zacks Rank ranges from #1 (Strong Buy) to #5 (Strong Sell) and measures the strength of earnings estimate revisions. Based on a proprietary set of measures, stocks which are seeing earnings estimates rise (fall) by the greatest degree are a Rank #1 (Rank #5). Notice that Cepella is the only Rank #1, while Bright Family Solutions (BFAM) and Grand Canyon Education (LOPE) are Zacks Rank #2. The other companies are Zacks Rank #3.
Cepella has seen the large number of upward earnings revisions for the next two fiscal years and no downward revisions over the past thirty days. Devry and ITT stand out as finding downward revisions relative to upward revisions, but Bright Family Solutions and Bridget Point Education catch some attention for the next fiscal year.
The table reveals that ITT and Apollo may be cheaply priced because of the outlook for poor earnings growth in the coming year. Notice that both companies are expected to see negative EPS growth. Bridge Point is also forecast to see contraction.
Bright Horizon and Grand Canyon are forecast to post the best growth rates.
Although ITT Education Services and Apollo look cheap on the basis of valuation, they are showing contracting earnings growth and it is hard to embrace these names. They may be studying a turn around story but have not passed. A quick look at the charts also provides little insight, as both appear to be in longer term basing patterns, at best. It is hard to get excited.
Capella may have the strongest story with its competency based degree; however, the market seems to be pricing this dynamic given the valuation. Given the upward revision to earnings estimates, which is probably based on the tailwind created by the new degree program, the stock should be of interest to those investors who like the upward momentum in earnings estimates. Aggressive investors, who can tolerate risk, should take a deeper look.
Looking at the middle of the pack, Bright Horizon may be of interest. There is not much fundamental history as this stock is a recent IPO, but the low price to sales ratio, reasonable PEG ratio and EPS growth stand out, providing appeal. Technically, the stock has been ranging between about $30 and $38. A move out of the top of this range could spark some technical interest and draw in some buying.
That's my lesson for today.
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