Is There A For Profit Education Stock That Gets an A+?

Hard to think of any sector hit harder than the For Profit Education Stocks.  I thought i would look at the top 4 or 5 and see if any of the (ahem) make the grade.

Here are the top ranked stocks:

Ticker	Rank	Date	Stock Price	Market Cap	Earnings Yield	ROIC	Yahoo Yield
BPI	1	4/20	11.01	612	64%	222%	0.0%
ESI	2	4/20	17.73	414	68%	171%	0.0%
APOL	3	4/20	17.57	1,987	40%	128%	0.0%
CPLA	4	4/20	36.25	458	17%	132%	0.0%
STRA	5	4/20	45.63	516	20%	94%	6.4%
EDMC	6	4/20	5.86	731	14%	45%	0.0%
DV	7	4/20	27.80	1,794	15%	46%	1.0%
GPX	8	4/20	22.64	438	8%	78%	0.0%
LOPE	9	4/20	25.82	1,171	10%	42%	0.0%
WPO	10	4/20	435.36	3,145	8%	26%	3.4%
XRS	11	4/20	9.43	736	5%	42%	5.3%

Now let us look at each of the top ones.

BPI - first, how fast are revenues dropping?  Pretty funny, I guess I just assumed revenues were dropping as this segment is so under attack.  But BPI has increased revenues over the past three years from $713m to $933m to $968m in 2012.  I think here, the issue has been the cost of these revenues. In 2010 and 2011, they brought 44 cents out of every dollar of revenues to operating profit. In 2012, that dropped to 33%.  Still, they made $127m after taxes etc in 2012. Seems pretty good for a company with a 612 market cap and $390 million of cash.  Is there a reason I should not just buy this stock and stop the analysis?  Hmm, just noticed they report earnings tomorrow. Wonder how that will change things?

All of these FPE stocks are under pressure regarding their business models, reliance on student loans and alleged sub-par placement rates.  I am sure some of it is true. But a BPI employs over 4,000 people. I do not think it will politically popular to shutter these institutions.  Rather it is more likely that the Dept of Education will give them a road map to turning things around, unless of course there is blatent fraud.

Always good to read Seeking Alpha - here is an article I found (Bridgepoint: The Risks Are Real). It was a very strange article.  It said not to buy BPI because the CEO made $2.4m, they give stock options and RSUs to management, they have some lawsuits against them and there is a risk of greater regulation.  You know, I could pick about 400 stocks out there and say the exact same things.  I guess he should go buy Berkshire. The question really is whether those risks are baked in the stock price.  I think they are.

ESI - wow, has this stock crashed or what? I remember when they were pushing $100 a share and making $13 a year.  Now they are $17!  Is that drop warranted?  Well, unlike BPI, revenues have been dropping at ESI.  Down 6% in 2011 and then a very large 14% in 2012.  And their margins have dropped from 38% to 18%.  Obviously there are fixed costs (lots of property etc); and the margins are pressured as revenues decline.  Looking at q1 2013, just released, the trend is continuing with revenues down almost 16% year over year.  Margins dropped even further to 11%.  I am willing to buy stocks with some hair on them, but this one is like Chewbacca!  Are their any redeeming qualities?  Well, perhaps I am being rash.  Even with the plummeting revenues and margins, they still made $1.33 per share in the 1st quarter. They are expected to earn $2.46 next year. That is not bad for a $17 stock.  Of course the $64,000 question is whether revenues will stop falling and/or will they cut expenses.  I was stunned to see that expenses a year ago were $241m, now they are $234m. That in the face of a 15% revenue decline!  I'd respectfully suggest management is not facing reality.  I will move this to the do not buy bucket.

APOL -  It would seem harsh to go against Zeus' son.  God of Truth and Prophecy.  This is the largest of the FPE stocks with a market cap pushing $2b. But just a year ago they were over $4b, so that is not exactly a stellar achievement. Largest may mean you have the biggest bulls-eye on your back, but it may also give you the resources to address issues. Kind of like ESI, they dropped 4% in revenue in 2011 and then another 10% in 2012. Also like APOL, they have had a free fall in margin, going from 31% two years ago to 17% for 2012. As I go through these figures, it becomes clear that the issue is fixed expenses for all these companies. APOL operating expenses were $3.406b in 2010 and only dropped to $3.339b in 2012, despite the revenues dropping by over 14%.  Hmm, the redeeming fact about APOL is it appears they are now actively trying to bring down expenses.  In Q1 and Q2 of 2013, their operating expenses were $1.5b.  That is a much better run rate than the $3.339b shown above for full year 2012. They do have $474m of excess cash (very strong for a $2b company). Analysts expect them to earn $2.74 for year ending Aug 2013 and $2.22 for year ending 2014 (with a further 10% revenue drop).  If you put in the lowered earnings into MFI formula, they would still be a top 50 stock. Looking at cash flow, they generating $1.045b in 2010, 0.897b in 2011 and 0.551b in 2012. I know that is a sharp decline, but still to generate 1/2 a billion cash flow for a $2b company is pretty darned good. Last two quarters have been about $300m.  Hmm, I am starting to think we may have a winner.

CPLA - even though still "cheap" Capella has been one of the better performing stocks of late in this space. They are up a snappy 28% since the start of 2013.  Is there still potential?  They are actually trading near their 52 week high.  Unlike our first three furry friends we have discussed, CPLA has managed to keep income pretty flat over past 3 years: 422m, 430m and 426m. Wow! Well, I guess BPI did that as well. Operating expenses have gone up an inflationary 4% a year, so margins have been eroded slightly. They have $110m of excess cash against a $458 market cap.  They are also a cash generating machine, around 70 million per annum.  Wonder how they have managed not to lose students? Can it last?  I did a bit of digging and from the articles I read, it does seem that Capella is considered to be the best of the For profit schools as far as quality of education and not just trying to troll for bodies to pay tuition. I do think there is a place for For Profit Education.  But it has to be a value proposition - both ways.  Hmm, these guys look pretty tempting.  may be good idea to buy Best of Breed in a space like this.

STRA - I actually owned Strayer at one point as a dividend stock (back when they payed a $4 dividend). Thankfully I sold them around $133 as they are at $45 now.  Wow, pretty sharp decline.  Any value there? Or is this a steenker?  Like our friends, STRA has seen revenues drop, not as much as some... 11% in past two years, but as we have seen, that can stress the bottom line.  Margins have dropped from 36% to 25%, but hey, 25% doesn't seem THAT bad.  They announced 1st quarter just on Thursday and obviously were not good as stock dropped from $49 to $45.  But were they that bad?  Revenues were down 8%. But they still earned $1.59 per share.  They expect to earn $1.37 next quarter. They have $50m of excess cash against $500m market cap. So good, but not as good as many peers.  They are actively buying back stock, I have not seen that from the others.  Digging into this, I can not see how STRA is a better buy than CPLA. 

Good stuff, welcome comments from followers.  It was very helpful to me to talk this out.  There are many, many scary/negative articles about this space.  But I still believe it can serve a purpose.  I do believe there will be survivors in this space.  The business models can/will change.  There will undoubtedly be increased competition from traditional schools as they go more on-line/night school etc.  Ironically, if a couple of these schools have to move on due to being more about the profit than the education, that may be better for those that survive.  I can clearly see why CPLA is trading near 52 week high, though it should be noted that could more than double and be nowhere near all-time high (over $90).  From this discussion CPLA is my pick.  I will now go through other stocks and other industries and then decide if CPLA makes the portfolio of 5.