The recession is making industries obsolete at a frightening rate. Local newspapers, hedge funds, estate agents – a sizeable chunk of the labour force faces the prospect of starting from scratch. ‘Reskilling’ is sure to become as overused a buzzword as ‘bail-out’ as unemployment soars and workers try to figure out which industries will be left when the economy finally recovers.
In a typical recession, a one-percentage-point rise in unemployment results in a two points lift in enrolment in education programmes. But this is no ordinary recession. Technical colleges across the US are seeing an unprecedented leap in enrolments. Low-cost training courses that can be completed quickly are the most popular – two-year courses that specialise in IT and business, for example. And many people are ‘reskilling’ online. Strayer, which specialises largely in business degrees, says total university enrolment rose 22% last quarter, with a 20% rise in campus students and a 47% rise online. Recent enrolment growth for several for-profit schools has been in the 20%-30% range, says Morgan Stanley analyst Suzanne Stein.
These education groups have been stealing students from colleges and universities for years. The for-profit education market now generates revenue of more than $18bn a year and accounts for 7% of all undergraduates, notes Bill McVail, manager of the Turner Small Cap Growth fund. You can put that down to a change in the profile of the student population. The average US student is no longer fresh-faced, living on campus and bank-rolled by their parents. Today, most students are working adults – squeezing time in for studies between work and raising a family. It makes more sense for them to sign up to a short technical course offered by for-profit universities.
And while Ivy League colleges are in a financial tangle as their endowment funds wilt, for-profit education groups remain profitable and cost-effective. They might be losing students from the corporate sector as businesses cut back on training budgets, but they are mostly debt free and generate plenty of cash. By collecting payments up front and paying out many of their expenses later, they usually have plenty of cash on hand. Expenses have also fallen. These groups spend up to 30% of their revenues on marketing, but weakness in the advertising market means they don’t have to pay as much for their TV spots. As the recession hits the budgets of American states, state colleges are having to cap enrolment, raise tuition fees and cut degree programmes. This will drive students into private lecture halls in a big way, says Suzanne Stein.
The big risk is how Barack Obama views the industry. Investors were rattled recently when the administration said it would phase out the Federal Family Education Loan programme, ending private bank involvement in Federal student loans. But there’s nothing to say that Washington will single out for-profit schools for unfavourable treatment. Given the budget constraints of publicly funded institutions, marginalising these schools wouldn’t help matters. If anything, Obama’s pledge to reduce the burden of student debt could mean a greater availability of student loans. McVail reckons student enrolments will rise by at least 12% this year and over the next two years. We look at two promising school stocks below.
Technical colleges: the best bets in the sector
ITT Educational Services (NYSE:ESI) is the most counter-cyclical of the school companies and the one most likely to benefit from a sagging economy, says Kiplinger’s Illana Polyak. The firm serves 62,000 students, with programmes geared towards IT, design and health sciences. The company is expanding its existing campuses, with enrolment up 17% last year, and average revenue per student up 3%. Fears about its reliance on private financing for student loans have left the stock trading at a significant discount to the market on a forward p/e of 14.7. But the company has reduced its non-federal loan exposure from 29% to 18% and it will have dropped to 12.5% by the year end, says Suzanne Stein. Morgan Stanley reckons it will soon close on its peers.
Closer to home, Jim Slater tells Investors Chronicle that UK-based outfit Education Development (LSE:EDD) is “well suited to today’s conditions”. The company is a £38.5m educational quality-assurance firm. It is regulated in Britain, but has more than 200,000 candidates registered each year across 103 countries and over 650 university customers for its online assessments. With forecast earnings per share (EPS) of 9.4p, at 66.8p, it trades on a prospective p/e of 7.1. The annual rate of growth will slow from its current 65%, but even so, it’s “hard to understand why a business so suited to today’s difficult conditions… should be on such a low prospective multiple”, says Slater. It should be noted that Slater himself holds 3.7% of the company, which has contributed to its recent run.