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Schools Industry Outlook: Near Term to Come Off With Flying Colors

Shrabana Mukherjee

The Zacks Schools industry comprises for-profit education companies that offer undergraduate, graduate and specialized programs in the 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 and 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:

  • A lower unemployment level and higher disposable income are working in favor of for-profit education companies. An improving business climate under the Trump administration seems to be the biggest catalyst for the industry. The for-profit education regulations are set to be revised to make the industry favorable for 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 developments like switching to online education programs, increasing use of technology in education, increasing investment in education, regular introduction of programs and specializations to boost student outcomes along with tie-ups with different organizations to reduce exposure to Title IV funding, 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 Bullish Prospects

The Zacks Schools industry is an 18-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #25, which places it at the top 10% 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.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. While the industry’s earnings estimates for 2019 have increased 8.7% since Jan 31, 2019, the same for 2020 have gone up 7.9% over the same period.

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 stocks in this industry have collectively lost 11.7% versus the broader sector’s decline of 3.5%. Meanwhile, the S&P 500 has gained 1.8%.

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 29.1X versus the S&P 500’s 16.6X and the sector’s 18.4X.

Over the past five years, the industry has traded as high as 38.4X, as low as 15.5X and at the median of 28X, 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 profitability, along with the strategic initiatives, are also expected to boost 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.

Strategic Education Inc. (STRA): Headquartered in Herndon, VA, this post-secondary education provider carries a Zacks Rank #1. The company has an expected earnings growth rate of 36.2% for the current year. Over the past 60 days, the Zacks Consensus Estimate for 2019 EPS has risen 7.1%.

Price and Consensus: STRA


Career Education Corporation (CECO): Schaumburg, IL based educational services currently carries a Zacks Rank #2. The company has an expected earnings growth rate of 11.4% for the current year. Over the past 60 days, the Zacks Consensus Estimate for 2019 EPS has risen 3.5%.

Price and Consensus: CECO



Grand Canyon Education, Inc. (LOPE): Headquartered in Phoenix, AZ, this company provides education services in the United States and Canada. The stock carries a Zacks Rank #2 and the consensus EPS estimate for the company has increased 2.3% to $5.24 for 2019, over the past 60 days.

Price and Consensus: LOPE



Bright Horizons Family Solutions Inc. (BFAM): Headquartered in Watertown, MA, Bright Horizons is a leading provider of high-quality child care, early education and other services. The stock currently carries a Zacks Rank #2 and has an expected earnings growth rate of 12.8% for the current year. Over the past 60 days, the Zacks Consensus Estimate for 2019 EPS has risen 1%.

Price and Consensus: BFAM



Lincoln Educational Services Corporation (LINC): Headquartered in West Orange, NJ, this company provides career-oriented, post-secondary education services to high school graduates and working adults in the United States. The stock currently carries a Zacks Rank #2 and has an expected earnings growth rate of 148.2% for the current year.

Price and Consensus: LINC




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Strategic Education Inc. (STRA) : Free Stock Analysis Report
 
Grand Canyon Education, Inc. (LOPE) : Free Stock Analysis Report
 
Lincoln Educational Services Corporation (LINC) : Free Stock Analysis Report
 
Career Education Corporation (CECO) : Free Stock Analysis Report
 
Bright Horizons Family Solutions Inc. (BFAM) : Free Stock Analysis Report
 
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