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5 School Stocks Surviving Industry Challenges

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Although companies in the Zacks Schools industry have been experiencing improved enrollment growth due to sustained vaccination drive and a solid stimulus package, increase in employee compensation costs, advertising and marketing expenses along with costs pertaining to online education are pressing concerns. Nonetheless, for-profits education companies are forging corporate and community college partnerships to educate their workforce. Prudent cost management, persistent focus on driving profitability and strategic initiatives are expected to lend support to some prominent players in this industry like Bright Horizons Family Solutions Inc. (BFAM - Free Report) , Adtalem Global Education Inc. (ATGE - Free Report) , Stride, Inc. (LRN - Free Report) , Perdoceo Education Corporation (PRDO - Free Report) and Lincoln Educational Services Corporation (LINC - Free Report) .

Industry Description

The Zacks Schools industry comprises for-profit education companies that offer undergraduate, graduate and specialized programs in areas of finance, accounting, analytics, marketing, healthcare, business and technology. They are engaged in offering career-oriented programs in the field of business and management, nursing, computer science, engineering, information systems and technology, project management, cybersecurity as well as criminal justice. The industry players also offer child care services and career-oriented, post-secondary courses. Some companies within the industry also provide yoga classes and yoga-related retail merchandise-integrated fitness classes along with conduct workshops and teacher training programs.

3 Trends Shaping the Future of Schools Industry

Regulations & COVID-19 Impact: Growth of the industry may get impeded by legal and regulatory issues faced by post-secondary schools in the United States. President Joe Biden has pledged to stop for-profit colleges from “profiteering off of students” and promised to enact policies that hold these colleges accountable. Biden’s aim of reinstating the gainful employment rule of the Obama Administration and close the 90/10 loophole that the colleges use to avoid federal regulation may prove unfavorable for the industry players.

Additionally, increased competition, higher expenses for various programs and shortage of skilled labor are concerning. Higher unemployment levels may prove detrimental to for-profit education companies.

The COVID-19 pandemic may cause a disruption in educational services. General economic slowdown may reduce the number of jobs available to graduates and result in lower salaries being offered in connection with the available employment, which will affect the companies’ placements and persistence. Additionally, the slowdown may compel students to repay their loans, which could increase institutions’ student loan cohort default rates, ultimately increasing bad debt expense. Higher default rates may also adversely impact the industry players’ eligibility to participate in some Title IV programs, in turn affecting the companies’ operations and financial condition.

Rising Demand for Online Education: Amid the novel coronavirus outbreak, for-profit education stocks have been reaping benefits from the rise in virtual delivery of education. As the world struggles to contain the virus spread, many for-profit education companies have undertaken initiatives to reach students who aspire to complete their courses as planned, with the help of various online education platforms. Also, classroom type education providing companies like Universal Technical Institute, Inc. (UTI - Free Report) , Lincoln Educational Services and Perdoceo Education are cashing in on the unprecedented surge in the demand for online education these days.

Cost-Saving Efforts, Increasing Use of Technology & Introduction of More Programs: In order to boost profitability, school companies are resorting to aggressive cost cutting through significant layoffs, campus closings and consolidations. Developments like switching to online education programs, increasing use of technology in education, more investments in education, and regular introduction of programs and specializations should boost student outcomes along with tie-ups with different organizations to reduce exposure to Title IV funding, improve academic quality as well as retain students. Many for-profit education companies are investing in non-degree programs and designing programs that are specifically aimed at meeting the educational needs of working adults in targeted professions.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Schools industry is a 19-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #205, which places it at the bottom 18% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since March 2021, the industry’s earnings estimates for 2021 have been revised 32.1% downward.

Despite the industry’s gloomy near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Lags Sector & S&P 500

The Zacks Schools industry has underperformed the broader Zacks Consumer Discretionary sector and Zacks S&P 500 composite over the past year.

The stocks in this industry have collectively lost 49.6% against the broader sector’s growth of 24.1%. Meanwhile, the S&P 500 has risen 36.2% in the said period.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing for-profit education stocks, the industry is currently trading at 28.5X versus the S&P 500’s 21.8X and the sector’s 27.7X.

Over the past five years, the industry has traded as high as 47.4X, as low as 23.4X and at a median of 31.4X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

5 School Stocks to Keep a Close Eye on

Below we have discussed five stocks from the industry that have solid growth potential. The chosen companies currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bright Horizons Family Solutions Inc.: Based in Newton, MA, this company is a leading provider of high-quality education and care solutions. Although the impact of the COVID-19 pandemic on operations and temporary closure of certain child care centers have been impacting the company’s revenues, the ramp-up of its centers and phased re-opening of a limited number of centers are encouraging.

The stock has declined 11.8% in the year-to-date period, performing better than the industry’s 20.6% decrease. This company’s earnings for 2021 and 2022 are expected to grow 45.8% and 84.7%, respectively.

Price and Consensus: BFAM

Adtalem Global Education Inc.: This Chicago, IL-based company provides educational services worldwide. Its focus on innovation in product offerings, driving growth in Becker and providing a broad range of options for Association of Certified Anti-Money Laundering Specialists or ACAMS offerings bode well. Adtalem has multiple courses to drive revenues that comprise tapping strong demand for Medical and Healthcare professionals, capitalizing on solid demand in the mortgage market and OnCourse Learning.

The stock has climbed 3.3% year to date against the industry’s 50.6% decline. This company’s earnings for fiscal 2021 and 2022 are expected to grow 31.1% and 13.7%, respectively.

Price and Consensus: ATGE

Stride, Inc. (formerly known as K12 Inc.): Headquartered in Herndon, VA, this technology-based education company has been gaining from higher enrollment and cost-saving efforts. Persistent demand for online learning options has been benefiting Stride’s top line in recent times. Investments focused on improving user experience, enhancing teacher tools and strengthening student engagement also bode well. In addition to higher enrollments and stronger-than-expected student retention (partly attributable to revenues it recognized in relation to the services provided in fiscal 2020), the Galvanize acquisition is expected to contribute to revenues as well.

The stock has gained 47.6% so far this year against the industry’s 50.6% decline. The company’s earnings for fiscal 2021 are expected to grow 171.7%.

Price & Consensus: LRN

Lincoln Educational Services Corporation: Based in West Orange, NJ, this company provides career-oriented post-secondary education services to high school graduates and working adults in the United States. Improved operating performance at its 22 campuses, consolidating facilities, a new welding program, a reinvigorated corporate partnership and changes in the admissions team have been a boon for Lincoln.

The stock has climbed 8.5% year to date, outperforming the industry. This company’s earnings for 2021 are expected to grow 10.6%.

Price and Consensus: LINC

Perdoceo Education Corporation: Headquartered in Schaumburg, IL, this company offers bachelor's, associate and non-degree programs in information technologies, visual communication and design technologies, business studies as well as culinary arts. It has been benefiting from improvement in enrollment trend at both of its segments — Colorado Technical University (CTU) and American InterContinental University (AIU). Apart from higher revenues, operating efficiencies at both CTU and AIU along with the Trident acquisition bode well. The company’s focus on increased investments in technology and student-serving processes drives growth.

The stock has lost 9.6% year to date, outperforming the industry. This company’s earnings for 2021 and 2022 are expected to grow 3.9% and 8%, respectively.

Price and Consensus: PRDO