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School Industry Outlook: DeVos Raises Hope Amid Low Enrollment

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Improving consumer confidence, a lower unemployment rate and higher disposable income should drive the performance of for-profit education stocks. Near-term prospects look bright as a steadily improving domestic economy and robust economic data will continue to support this industry. Notably, a friendly approach by Betsy DeVos, the Secretary of Education, toward the for-profit education companies seems to be the biggest catalyst for the industry.

The industry has been witnessing some noteworthy trends and developments that include switching to online education programs, more use of technology in education, increasing investment in education, regularly introducing new programs and specializations to boost student outcomes along with the tie-ups with different organizations to reduce its exposure to Title IV funding and to improve academic quality and retain students. Many for-profit education companies have been investing in non-degree programs and designing programs that are specifically aimed at meeting the educational needs of working adults in targeted professions.

Importantly, the Trump administration is set to revise for-profit education industry regulations, as announced by the U.S. Department of Education last year. The department intends to bring about changes to the Borrower Defense to Repayment (BDR) and Gainful Employment (GE) system, introduced during Obama’s reign. The for-profit education companies are poised to surge, given the friendly approach of the Trump administration toward these companies.

However, the growth of the market is being hindered by legal and regulatory issues faced by postsecondary schools in the U.S., increased competition, higher expenses necessary to support various programs and shortage of skilled labor.

Industry Lags in Terms of Shareholder Returns

Looking at shareholder returns over the past year, it is quite apparent that investors are not too confident about the industry’s prospects. Despite improving economy and friendly approach of the Trump administration, the space still has a lot of uncertainty shrouding growth in enrollments.

The Zacks School Industry, a 21-stock group within the broader Zacks Consumer Discretionary Sector, has underperformed the S&P 500 index as well as its own sector over the past year.

While the stocks in this industry have collectively declined 17.9%, the Zacks S&P 500 Composite and the Zacks Consumer Discretionary Sector have gained 15.7% and 8%, respectively.

One-Year Price Performance


        
Industry Remains Pricey for Investors

One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which is the most appropriate multiple for valuing Consumer Discretionary stocks because their earnings are effective in gauging performance.

Generally, the price of a stock rallies on a rise in earnings. As forecasts for expected earnings move higher, demand for the stock should drive its price. If the P/E of a stock is rising steadily, it means that investors are pinning their hopes on the company’s inherent strength.

This ratio essentially measures a stock’s current market value relative to its earnings performance. Investors believe that the lower the P/E, the higher will be the value of the stock.

Although the industry has exhibited massive underperformance over the past year, its valuation picture looks somewhat expensive when compared with the broader market. The industry currently has a trailing 12-month P/E ratio of 39.3, which is at a premium to the S&P 500’s P/E ratio 19.9.

Price-to-Earnings Ratio (TTM)


 

Meanwhile, the parameter shows that the group’s P/E ratio — at 39.3 — is significantly above that of its broader sector’s 24.2. The Zacks Scool Industry’s trailing 12-month P/E ratio and the median level of 54 for the same period are significantly above the Zacks Discretionary Sector’s respective ratios.

Price-to-Earnings Ratio (TTM)


 
Solid Earnings Outlook

Although weak enrollment growth has been hampering performances of some of the industry biggies, the Zacks School Industry is likely to deliver positive returns over the near term driven by solid economic fundamentals as well as expectations of industry-wide margin improvement, arising from aggressive cost-cutting measures through significant layoffs and campus closings.
 
But what really matters to investors is whether or not this group has the potential to perform better than the broader market in the quarters ahead. One reliable measure that can help investors understand the industry’s prospects for a solid price performance, going forward, is the industry's earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.

The Price & Consensus chart for the industry clearly shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.

Price and Consensus: Zacks School Industry


 
This becomes clearer when we look at the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Current Fiscal Year EPS Estimate Revisions



 
As you can see here, the current EPS estimate of 94 cents for 2018 has increased from the end of July figure of 86 cents. In other words, the sell-side analysts covering the companies in the Zacks School industry have been optimistic about raising their estimates.

Zacks Industry Rank Confirms Bullish Sentiment

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, paints an optimistic picture for the near term.

The Zacks School Industry currently carries a Zacks Industry Rank #90, placing it at the top 35% of more than 250 Zacks industries. 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. In fact, the industry has remained in the top 50% bracket in seven of the trailing eight weeks.

Industry Assures Long-Term Growth

The long-term EPS (3-5 years) growth prospects for the Zacks School Industry looks appealing when compared with the broader Zacks S&P 500 Composite. The group’s mean estimate of long-term EPS growth rate is at the current level of 15.9%. This compares to 9.8% for the Zacks S&P 500 Composite.

Mean Estimate of Long-Term EPS Growth Rate


 
In fact, the basis of this long-term EPS growth could be recovery in the top line that companies in this industry have been showing since the end of 2014.


Bottom Line

The overall economy and leading economic indicators provide general insight into projecting the industry’s growth. Undeniably, as the employment situation is improving, more individuals are opting for jobs and demand for academic programs is declining, thereby hampering the growth prospects of for-profit education companies.

Nevertheless, the for-profits are also forging corporate and community college partnerships to educate their workforce. Further, prudent cost management and continued focus on driving profitable growth, along with the strategic initiatives will drive the industry’s growth.

Keeping the solid prospects in mind, investors can bet on a few school stocks that have a strong earnings outlook. Below we present four promising stocks from the industry, which have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have witnessed upward earnings estimate revisions in the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Bridgepoint Education, Inc. (BPI - Free Report) : San Diego, CA-based postsecondary education service provider sports a Zacks Rank #1. The consensus EPS estimate for the company has increased 166.7% to 64 cents for 2018 and 94.1% for 2019, over the past 60 days.

Price and Consensus: BPI


 

Strategic Education, Inc. (STRA - Free Report) : Herndon, VA-headquartered company, through its subsidiaries Strayer University and New York Code and Design Academy, provides a range of post-secondary education and other academic programs in the United States. The stock sports a Zacks Rank #1 and the consensus EPS estimate for the company has increased 11.3% to $4.54 for 2018 and 32.8% to $6.15 for 2019, over the past 60 days.

Price and Consensus: STRA


 

Grand Canyon Education, Inc. (LOPE - Free Report) : Headquartered in Phoenix, AZ, this company provides education services in the United States and Canada. The stock carries a Zacks Rank #2 and the consensus EPS estimate for the company has increased 2.9% to $4.89 for 2018, over the past 60 days.

Price and Consensus: LOPE



 

Lincoln Educational Services Corp. (LINC - Free Report) : Based in West Orange, NJ, the company provides various career-oriented post-secondary education services to high school graduates and working adults in the United States. The stock carries a Zacks Rank #2 and the consensus loss estimate for the company has narrowed down to 9 cents from 14 cents for 2018, over the past 60 days. Meanwhile, the earnings estimate has increased 11.1% to 10 cents over the said time period.

Price and Consensus: LINC



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