Education stocks: Is the Downturn Finally Over? – ValueWalk Premium
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Education stocks: Is the Downturn Finally Over?

For profit education companies have been under pressure lately as declining student enrollments across the country stand to impact the entire sector.

As if this was not enough, the government is following up with its pending reforms, aimed at tackling high student loan balances, with increased vigor. Many contend that formal education is losing its appeal and is an indication the sector will underperform for a long time.

As a result, stocks of for-profit education companies including Grand Canyon Education Inc (NASDAQ:LOPE), Corinthian Colleges Inc (NASDAQ:COCO), and Strayer Education Inc (NASDAQ:STRA) have been getting thumbs down for investors. From mid February through mid March, Corinthian Colleges ans Strayer are both down over 10%.

However, a contradicting version of the story is presented by latest employment data which indicate that a steady recovery is underway in the job market. This improvement should go a long way in restoring the long-held faith in formal education. The sector is also affected by a bill which proposes to increase Education Department’s scrutiny in these companies. These fears appear to be overblown as the current government has no history of being so reactionary.

Education stocks: Is the Downturn Finally Over?

California based Corinthian Colleges Inc (NASDAQ:COCO) lost nearly 15 percent in the last month, largely in response to weak financial results. For the quarter ended December, the company saw a 4.5 percent increase in revenues but higher costs and extraordinary charges pushed it into the red.

It is worth noting, however, that its core operations are still growing and the quarterly loss of $68,000 was largely caused by reversal of tax benefits on discontinued operations. The stock is currently available near the lower end of its 52 week trading range of $1.74 -$ 4.60.

Grand Canyon Education Inc (NASDAQ:LOPE) has lost more than 11 percent in the last couple of weeks after hitting a new 52-week high. Currently trading at $24, the stock is available at a price earnings ratio of 15.75 which further reduces to 12.4 on a forward basis.

The company is one of the stronger players in the sector. This is visible in its latest quarterly financial performance, which gave a 24.7 percent boost to the top line while net income jumped to $21 million, up from $15.3 million in the same period last year. This financial performance was clearly ahead of the street's expectations and the company topped it with an upbeat first quarter 2013 guidance. The latest pullback appears to be more of a sentimental move in sympathy with wider market than anything based on its performance.

Unlike the other two in the pack, Strayer Education Inc (NASDAQ:STRA) is a profitable company that pays dividend too. At the current market price of $50.7, up merely 20 percent to its 52-week low, the stock offers a mouth watering dividend yield of close to 8 percent.

More than the generosity of the company, this high yield is a result of the 25 percent drop in the stock price in the last six months. The weakness in Strayer’s core operations, which started in 2011, continued throughout much of last year; however, the results in the latest quarter indicate a turnaround is underway.

While its revenue and net income both increased, the growth in profits from $4.1 million to $16.6 million was markedly high. It is also worth noting that the company carried a high amount of cash – $47.5 million at the end of the quarter against the long term debt of $121.9 million.

Overall, this could be a time to start looking favorably at education stocks as the impact of negative factors is already reflected in stock prices and investor sentiment for the sector is at a record low. The recovery in the sector, as suggested by a steady improvement in jobs data, may be a gradual one and may take a long time to fructify. However, attractive entry points more than make up for a delayed rally.


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