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Schools Industry Outlook: Business Climate to Act in Favor

Zacks Equity Research

The Zacks Schools industry comprises for-profit education companies that offer undergraduate, graduate and specialized programs in areas of finance, accounting, analytics, marketing, healthcare, business and technology. The industry players also offer child care services and career-oriented post-secondary courses.

Some companies within the industry also provide yoga classes, yoga-related retail merchandise-integrated fitness classes and conduct workshops and teacher training programs.

Let’s take a look at the industry’s three major themes:

  • Lower unemployment level and higher disposable income are working in favor of for-profit education companies. Importantly, improving business climate under the Trump administration seems to be the biggest catalyst for the industry. The Trump administration is set to revise for-profit education industry regulations to make it favorable for the participants, as announced by the U.S. Department of Education last year. The department intends to bring changes to the Borrower Defense to Repayment (“BDR”) and Gainful Employment (“GE”) system introduced during Obama’s tenure.
     
  • This apart, in order to boost profitability, school companies have resorted to aggressive cost-cutting through significant layoffs, campus closings and consolidations. Also, the industry has been witnessing some noteworthy trends and developments that include switching to online education programs, increasing use of technology in education, increasing investment in education, regularly introducing programs and specializations to boost student outcomes along with tie-ups with different organizations to reduce exposure to Title IV funding and to improve academic quality and retain students. Many for-profit education companies have been investing in non-degree programs and designing programs that are specifically aimed at meeting the educational needs of working adults in targeted professions.
     
  • On the flip side, the growth of the industry is being hindered by legal and regulatory issues faced by postsecondary schools in the United States, increased competition, higher expenses for various programs and shortage of skilled labor.

Zacks Industry Rank Indicates Favorable Outlook

The Zacks Schools industry is a 19-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #45, which places it at the top 18% 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, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector & S&P 500

The Zacks Schools industry has lagged the broader Zacks Consumer Discretionary sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 17.9% over this period compared with the S&P 500’s decline of 7% and the broader sector’s decrease of 11.9%.

One-Year Price Performance




Industry’s Current Valuation

On the basis of 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 30.3X versus the S&P 500’s 16X and the sector’s 17.2X.

Over the past five years, the industry has traded as high as 37.4X, as low as 15.9X and at the median of 27.7X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500


 

Bottom Line

The current economic scenario, business climate and impending change in regulations bode well for the industry’s growth in the near term. Moreover, for-profits education companies are forging corporate and community college partnerships to educate their workforce. Prudent cost management and continued focus on driving profitable growth, along with the strategic initiatives, are also expected to drive the industry’s growth.

Here we present five stocks from the for-profit education industry, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Laureate Education, Inc. (LAUR): Headquartered in Baltimore, MD, this for-profit education company carries a Zacks Rank #1 and has a three-five year expected earnings growth rate of 12%. Over the past 60 days, the Zacks Consensus Estimate for 2019 EPS has increased 13.6%.

Price and Consensus: LAUR



GP Strategies Corp. (GPX): This Columbia, MD based company provides performance improvement and learning solutions worldwide. The stock carries a Zacks Rank #2 and has an expected earnings growth rate of 59.8% for 2019. Over the past 60 days, the Zacks Consensus Estimate for 2019 EPS has risen 3.1%.

Price and Consensus: GPX

 

K12 Inc. (LRN): This Herndon, VA-based technology-based education provider currently carries a Zacks Rank #2. The company has an expected earnings growth rate of 14.7% for the current year. Over the past seven days, the Zacks Consensus Estimate for fiscal 2019 EPS has increased 2.6%.

Price and Consensus: LRN


Universal Technical Institute, Inc. (UTI): This Scottsdale, AZ-based technical education provider currently carries a Zacks Rank #2. The company has an expected earnings growth rate of 57.6% for fiscal 2019. Over the past 60 days, the Zacks Consensus Estimate for fiscal 2019 EPS has narrowed from a loss of $1.05 to a loss of 64 cents.

Price and Consensus: UTI


Strategic Education Inc. (STRA): Headquartered in Herndon, VA, this post-secondary education provider carries a Zacks Rank #2. The company has an expected earnings growth rate of 33.5% for the current year.

Price and Consensus: STRA



 

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