| Near-Term
Spotlight -- The Education Industry |
Published: May 10, 2004
What has been one of the top-performing industries
over the past year? Five years? Would you guess Medical, Homebuilding,
Security, or possibly Biotech? While all these have been good
performers, the answer, surprisingly, is Education. The Education
industry has returned over +25% year-to-date and more than +60% over the
past year. Over the past five years the industry has returned a
staggering +35% annually, ranking it as the top performer over that time
period. Compared to the S&P 500, which has returned +21% over the
past year and has lost -2% in the most recent five-year period, the
Education industry's performance has been phenomenal.
Although a heated debate now rages as to whether the
industry is overvalued (of course, we have yet to see a industry where
there is no debate), this strong performer deserves a closer look.
Except for a few scandals and other major news items that have taken
place over the past year, Wall Street rarely takes an interest in this
industry. To most investors, this still is an undiscovered investment
area. Yet given its superior performance over the past several years,
investor interest in Education stocks is likely to heat up in the coming
years.
The Big Picture
Education remains one of the world's single largest expenditures. At
over $1 trillion, it represents more than 4% of worldwide GDP annually.
It is a service that virtually every person around the world uses at
some point in his or her lifetime. Yet while gross worldwide
expenditures on education are enormous, For-Profit Educators (FPEs)
account for only a fraction of those funds.
At the current time, listed education companies
concentrate mainly on post-secondary instruction; very few target lower
grade levels or tutoring. Post-secondary (college-level) education has
so far proven to be the most profitable niche for FPEs because this
segment is where consumers spend the most dollars per student. In
addition, educational services at this level can be readily delivered
via the Internet. The industry is a rare survivor of the Internet boom
years of the late 1990s. Though electronic educational courses were
developed prior to this time, technological advances have made it
possible to deliver this service on a much broader scale. Ironically,
the industry benefited more from the collapse of the Internet bubble
than from its rise. Millions of high-tech workers suddenly became
unemployed and quickly sought new skills or training. Because these
workers were already Internet-savvy, they were a natural fit for online
training programs. This has led to stellar growth for many online
universities throughout the past several years.
Huge Customer Base
Today, more than 90 million students are enrolled in post-secondary
schooling around the world. Although most of these students are enrolled
in traditional classes, the potential market for online education is
enormous. Of the estimated 1.2 million degrees awarded in America in
2002, only 10% utilized some form of distance-based learning. Therefore,
even though this industry has seen incredible growth in recent years,
the market is far from reaching a saturation point. More and more
students are choosing to conduct their studies remotely as opposed to
physically attending classes. This is not just because of convenience,
but also out of necessity. Our nation's collegiate population no longer
consists primarily of recent high school grads. In fact, online
educators mainly target a 24+ year-old student population. The majority
of individuals in this group are already employed but are seeking out
further instruction in an effort to develop a better skill-set.
Traditional class-based education tends to be highly inconvenient for
these people. By comparison, the flexible learning schedules provided by
online education often prove to be the most viable option for this
important market segment.
Public Acceptance
When online education first began in the mid-1990s, public response was
very under whelming. The common perception was that online learning was
a poor alternative to attending university classes for four or more
years. In addition, it was thought that only lazy or less intelligent
students would engage in this style of learning. Some even went so far
as to warn that online education could ultimately undermine the entire
educational structure as floods of gullible high school grads rushed
toward the Internet. In reality, however, online education has not
replaced traditional learning. Instead, it has complimented it. Many
online programs today are nationally accredited and are taught by
university-level professors. In the brief history of online education,
qualified graduates have been generally well received and have given
legitimacy to the online program.
Technological Advancement
Recent advancements in worldwide communications have been a major growth
driver for online educators. The speed and quality of such courses has
continued to improve. Meanwhile, communications costs have declined.
Today it is possible to broadcast a live class session simultaneously to
a group of students around the world. Merely a decade ago such a thing
would have been considered just a fantasy. In particular, online
education has enabled millions of students in lesser-developed nations
to receive high levels of education without leaving their home country.
Technology is now slowly beginning to close the education gap between
many rich and poor nations.
Mergers and Acquisitions
Like financial services or information technology, online education is a
perfect candidate for consolidation. Administrative and technology costs
are essentially fixed no matter how many students a company adds. This
means that educational companies tend to earn very high profit margins
as they continue to add additional students into the fold. Because of
this, bigger providers are continually gobbling up smaller ones each
year. Although the industry is still highly fragmented, it would not be
surprising to see perhaps just four or five major operators dominate the
entire worldwide industry in the next ten or twenty years.
Education Companies:
Top Near-Term Industry Pick: Corinthian Colleges
(COCO, $31.07)
Corinthian Colleges is one of the world's largest for-profit providers
of post-secondary education. On the heels of strong growth and a series
of recent acquisitions, the firm now operates 87 colleges in the United
States and 46 in Canada. The firm currently derives the majority of its
revenue from physical education facilities, where it boasts over 52,000
students that are enrolled a variety of associate, bachelor, masters and
technical programs. The company was founded in 1994 and went public in
1999. Since then it has seen rapid growth through a series of smart
acquisitions. Going forward, however, management has centered its
attention on moving toward a more balanced growth model, as it hopes to
fuel about half of its future growth through internal expansion.
Leader in High-Demand Areas
Corinthian offers degree programs in such popular areas as: business,
healthcare, information technology and criminal justice. In fact, the
firm is the world leader in producing healthcare professionals. Recent
trends in the U.S. job market bode well for Corinthian, as the
percentage of professional and technical jobs is increasing in the
United States every year. This figure is set to jump from +17.6% in 1998
to an estimated +19.4% in 2008. Universities everywhere are seeing
increasing demand for high-paying degrees. Currently, over 20% of all
undergraduate degrees are awarded in the Business field alone. The
continued outsourcing and decline in manufacturing jobs has driven the
recent trend to re-education.
Corinthian is also strong in technical areas like
diesel mechanics, HVAC, aviation and electrical technology -- areas that
are often overlooked by educators. These highly skilled and
labor-intensive jobs are suffering a tremendous shortage of workers.
They have declined in popularity with the information revolution as
workers have chosen “white-collar” employment. Ask anyone who has
recently hired an electrical, air conditioning, or automotive repair
specialist and they will tell you this shortage has driven up the wages
in these fields. Higher wages will undoubtedly drive an increase in
enrollment of students looking to learn these skills, and Corinthian
will benefit from this trend. A purely online education provider will
find it very difficult, if not impossible, to compete with the extensive
physical network of hands-on schools that Corinthian already has in
place.
Growth in Online Education
Although Corinthian already boasts two branches that specialize in
online education, the firm has plenty of room to grow in the online
arena. Management currently does not provide actual forecasts into the
growth rates it expects to see in its online divisions. However, one of
the firm's online units taught 1610 students in the most recent quarter,
representing a +364% increase over the previous year. Given that the
firm still derives only a small percentage of its annual revenues from
online education, we expect the firm's presence in this lucrative area
to grow by leaps and bounds in the years ahead.
Looking at the overall growth picture, Wall Street
currently expects the education industry as a whole to grow at a healthy
+13% annual clip over the next five years. However, Corinthian is
forecasted to grow at a +24% rate -- nearly double the industry average.
As we mentioned above, education firms tend to earn higher profit
margins as they add more and more students to their existing locations.
We expect Corinthian to continue to add new students both domestically
and internationally at an increasing rate for the foreseeable future.
With that in mind, the firm should have no trouble delivering
above-average growth in the coming years.
The Bottom Line
Corinthian has implemented its growth and acquisition strategy quite
well. Revenues have been skyrocketing -- up +55% in the first three
quarters of fiscal 2004 alone (Corinthian’s fiscal year ends June 30).
Meanwhile, the firm's net income has increased at a +30.5% clip over
that same time period. Looking at earnings per share (EPS), the firm
expects to deliver EPS of $0.94 this year and $1.28 next year, a +36%
increase. Same-school revenues have increased +26% so far this fiscal
year, outpacing management’s expectations for long-term growth in the
neighborhood of 20-25%.
Everything seems to be going Corinthian’s way at the
moment. Investor interest in the shares has soared in recent months. In
addition, the stock boasts a rare 5-star rating from S&P and has
benefited from several recent analyst upgrades. The main area that
analysts are watching, and which management is now working hard to
address, concerns the company’s gross margins. As mentioned earlier,
the firm's margins should expand as it adds more students to the fold.
Over the past year, however, the firm's margins have declined slightly
as the firm has spent additional cash to integrate all of its new
acquisitions and curriculums into one structure. Given management’s
exemplary track record in the past, we believe this is a temporary bump
in the road for the firm.
Corinthian's shares have pulled back in recent weeks
along with the overall market, providing investors with an excellent
entry point for a near-term investment. In addition, given the enormous
potential the firm has in the booming for-profit education market, as
well as its leading position in a number of important degree areas, my
staff and I have decided to add the shares to our Bellwether Portfolio.
We will do so at the opening bell on Tuesday, May 11th, and we'll
initiate coverage of the firm with a "Buy" rating and a
12-month price target of $42.
Corinthian Colleges (COCO, $31.07)
Market Capitalization: $2.8 billion
Shares Outstanding: 89.7 million
30-Day Average Volume: 1.6 million shares
2003 Revenue: $517.3 million
2001 EPS: $0.30
2002 EPS: $0.43
2003 EPS: $0.71
2004 EPS: $0.94 (estimate)
2005 EPS: $1.28 (estimate)
Five-year expected growth rate: +24%
Institutions own 87% of the firm's outstanding shares
52-week range: $21.60 - $36.19
----------------------------------------------
Other Notable For-Profit Education Companies:
Career Education Corporation (CECO, $66.87)
Career Education is the world’s largest private operator of on-campus,
for-profit training centers and colleges. The firm focuses on equipping
students in the following areas: visual communication and design
technologies, information technology, business studies, culinary arts
and healthcare. It offers programs from technical certificates to
doctoral degrees in 79 centers around the world.
Market Capitalization: $6.7 billion
Shares Outstanding: 100.4 million
30-Day Average Volume: 1.9 million shares
2003 Revenue: $1.2 billion
2001 EPS: $0.42
2002 EPS: $0.71
2003 EPS: $1.18
2004 EPS: $1.78 (estimate)
2005 EPS: $2.28 (estimate)
Five-year expected growth rate: +25%
Institutions own 92% of the firm's outstanding shares
52-week range: $28.50 - $70.91
----------------------------------------------
Apollo Group, Inc. (APOL, $91.97)
The Apollo Group is the world's oldest and largest online educator. It
is comprised of four distinct schools, the cornerstone being its 85%
stake in the University of Phoenix. Apollo operates 75 campuses and 125
learning centers in North America, where it boasts an industry-leading
227,800 students enrolled in its combined programs. The firm's
University of Phoenix online subsidiary is expected to grow at a better
than +50% clip next year.
Market Capitalization: $16.2 billion
Shares Outstanding: 179.1 million
30-Day Average Volume: 1.6 million shares
2003 Revenue: $1.3 billion
2001 EPS: $0.61
2002 EPS: $0.88
2003 EPS: $1.30
2004 EPS: $1.78 (estimate)
2005 EPS: $2.26 (estimate)
Five-year expected growth rate: +24%
Institutions own 77% of the firm's outstanding shares
52-week range: $51.73 - $96.41
----------------------------------------------
ITT Educational Services (ESI, $40.80)
ITT is a world leader in post-secondary technical education. It operates
77 technical centers in 30 states throughout the United States with an
enrollment of 38,000 students. ITT offers associate and bachelor degree
programs as well as technical certificates.
Market Capitalization: $1.87 billion
Shares Outstanding: 45.7 million
30-Day Average Volume: 1.3 million shares
2003 Revenue: $522.9 million
2001 EPS: $0.70
2002 EPS: $0.93
2003 EPS: $1.27
2004 EPS: $1.69 (estimate)
2005 EPS: $2.08 (estimate)
Five-year expected growth rate: +20%
Institutions own 95% of the firm's outstanding shares
52-week range: $26.45 - $60.75
|
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