December 13, 2010
NEW YORK—Next year is likely to be another tough one for-profit college operators as they cope with declining federal student aid, lower enrollment and proposed regulations that may force them to cut tuition.
While their shares were trending higher on Monday following the broader market trend, stock in companies that offer higher education for profit has fallen an average of 22 percent so far this year.
The companies have come under intense scrutiny because of student loan defaults. Critics have said some of the companies recruit overly aggressively and pull in unprepared students. The schools then get federally-backed student aid, the lion's share of their revenue, even if the students drop out -- while the students are burdened with debt.
The Department of Education has proposed new rules that could limit the companies' access to federal financial aid if too few of their former students repay loans or if their graduates owe too much.
That tightening in addition to an expected decline in Pell Grants and other government funding programs will create a highly competitive environment in which the companies fight for fewer dollars.
"We believe the for-profit industry will lose out, significantly impeding revenue and earnings growth," said FBR Capital Markets analyst Matt Snowling.
Some companies have already begun to prepare. Kaplan Higher Education, a unit of Washington Post Co., said last week that it was eliminating about 770 jobs because enrollment is slowing and the company is getting more selective in student admissions.
Apollo Group Inc., the nation's largest for-profit education company and operator of the multi-campus University of Phoenix, laid off 700 full-time employees in November, mostly in admissions.
Other companies expected to feel increased pressure from falling enrollment areCorinthian Colleges Inc. and Career Education Corp., Snowling said.
Shares of Corinthian Colleges fell about 1 cent to $4.46. Career Education Corp. rose 49 cents, or 2.5 percent to $20.41, and The Washington Post Co. rose $3.11, less than 1 percent, to $417.66.
Long-term investors willing to ride out some volatility may be rewarded if they invest in companies that successfully cope with the challenges, however, Snowling said.
He upgraded shares of Apollo Group to "Market Perform" from "Underperform" on Monday, but maintained a price target of $40 on the stock.
Its shares rose 65 cents, or 1.6 percent, to $38.60 by midday Monday.
Snowling said Monday that the company's management is taking the right steps -- cutting costs and focusing on higher-quality students -- to reposition it for a new regulatory environment.
"Make no mistake -- we continue to have a negative bias on the group due to regulatory and budgetary constraints, but we also believe that Apollo's strong brand and steady cash flow and earnings generation should provide support to the shares at current levels," he wrote.
DeVry Inc., which carries an "Outperform" rating, is among the for-profit school companies that FBR says are better positioned companies because of its consistent earnings growth, more diversified revenue stream, and relatively lower exposure to regulatory issues, Snowling said.
DeVry shares rose 7 cents to $44.92.
Direct Link to article: http://www.boston.com/news/education/higher/articles/2010/12/13/sector_snap_for_profit_colleges_face_challenges/