Let’s acknowledge the fact that it’s a flagging economy, and unfortunately there are not enough remedies to help it regain its lost momentum. With a stubbornly fragile job market, the economy’s outlook remains exceptionally bleak. Amid such a challenging macro environment, the for-profit education companies are finding it incrementally difficult to make their way out of the woods.

An X-Ray of the Situation

The waning economy combined with stringent regulatory environment and falling enrollments are making life tougher for education companies. These companies are now restraining from aggressive admission practices in the midst of condemnation related to the issue of a rise in the default rate of student loans.

Students generally flocked to the education institutions during sluggish economic conditions to enhance their skills in the intensely competitive job market. However, this did not bode well for many of them, who still find themselves lurching without a job. The current unemployment rate is hovering around 8.6%. These students, who generally use federal loans, find no means to repay them, and the end result is the ever-increasing rate of defaulters.

To curb this, Department of Education proposed that an educational program could only qualify for Title IV funds, if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios. The company derives a major portion of its revenues from federal student financial aid programs, the Title IV programs.

The education institutions are also under review due to high student-loan default rates. The imposed regulations are weighing upon students enrollment and the company’s profits.

The Lost Sparkle

The for-profit education companies have significantly lost their market value in the past one-year period, ending December 27, 2011. Capella Education Company’s (CPLA) shares had plunged approximately 45% to $35.71 and Strayer Education Inc.’s (STRA) shares had tumbled around 37% to $97.74.

Shares of Universal Technical Institute Inc. (UTI) had sunk approximately 42% to $12.76 and that of DeVry Inc. (DV) had slipped about 18% to $38.75. However, shares of Apollo Group Inc. (APOL) had jumped 41% to $54.53 during a span of a year.

Stock Analysis

Capella Education

Capella Education, which provides online post-secondary education services, saw its third-quarter 2011 earnings of 66 cents a share falling by 17.5% from the prior-year quarter. Total active enrollment dropped 7.5% during the quarter. New enrollment plunged 36%, reflecting tough market conditions, changes with respect to program accreditation, and stringent admissions criteria.

However, it expects re-registration of existing apprentices to remain robust, and forecasts softer declines. It now expects total enrollment to decline between 4% and 6%, and new enrollment to tumble approximately 10% in the fourth quarter. The stock currently holds Zacks #3 Rank that translates into a short-term Hold rating.

Strayer Education

The third quarter 2011 earnings of Strayer Education, which provides post-secondary education through traditional classroom and online, plunged 30% to $1.20 per share from the year-ago quarter. Total revenue dropped 8%, attributable to fall in enrollment. The educational institute said that total enrollment for fall 2011 declined 11%.

The company informed that total campus-based students fell 10% and online students slipped 15%. The company informed that new student enrollment plunged 15%. In order to check the waning revenue caused by falling enrollments, Strayer Education plans to implement a 3% hike in tuition fees with effect from January 2012. The stock currently holds Zacks #3 Rank that translates into a short-term Hold rating.

Apollo Group

The fourth quarter 2011 earnings of Apollo Group, a leading private education service provider, plunged 22.1% to $1.02 per share. Total revenue dropped 10.9% attributable to lower enrollments at University of Phoenix, partially offset by selective tuition price increases and better student retention rates.

Degreed Enrollment at University of Phoenix dropped 19.1%, primarily due to a drop of 33.5% in New Degreed Enrollment. However, management’s initiatives to expand revenue streams through acquisitions augur well for future operating performance. The stock currently holds Zacks #3 Rank that translates into a short-term ‘Hold’ rating.

Universal Technical Institute

Universal Technical Institute, a leading provider of postsecondary technical education, experienced a 17.2% decline in fourth-quarter 2011 earnings of 24 cents. Net revenue declined 6.6% reflecting fall in average undergraduate full-time student enrollment, partially offset by a rise in tuition fees.

The company reported that average undergraduate full-time enrollment dropped 11.3%, whereas student starts slipped 14.5%. Universal Technical cautioned that average number of students for fiscal 2012 will drop at a low-teens rate, and will consequently result in a mid to high single-digit revenue decline. The stock currently holds Zacks #5 Rank that translates into a short-term Strong Sell rating.

DeVry

DeVry, one of the leading educational service providers, registered sluggish first-quarter 2012 earnings of 83 cents a share that declined 19.4% from the year-ago quarter. Management hinted that deteriorating economic conditions and rising unemployment rate have negatively impacted the results.

Moreover, the new regulations associated with the education system have posed as a headwind. The company recently declared that total student enrollment for fall 2011 fell 5.9% due to a 24.6% decline in new undergraduate students’ enrollment.

New student enrollment plunged 33% at Carrington Colleges Group and dropped 1.6% at Chamberlain College of Nursing. The stock currently holds Zacks #5 Rank that translates into a short-term Strong Sell rating.

Closing Comments

The economy is still in the doldrums and for-profit education companies are facing the brunt, with falling enrollments that is muting the profits. To counter the gloom that the student enrollment is witnessing amid turbulent environment and regulatory issues, the company is pushing hard to manage costs effectively, trying means to improve marketing efficiencies and focusing on new programs.


 
APOLLO GROUP (APOL): Free Stock Analysis Report
 
CAPELLA EDUCATN (CPLA): Free Stock Analysis Report
 
DEVRY INC (DV): Free Stock Analysis Report
 
STRAYER EDUC (STRA): Free Stock Analysis Report
 
UNIVL TECH INST (UTI): Free Stock Analysis Report
 
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