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5 School Stocks Set to Gain Defying Industry Challenges
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The companies under the Zacks Schools industry have been facing COVID-related challenges like extended restrictions, higher advertising and marketing expenses along with costs pertaining to online education. 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) , Laureate Education, Inc. (LAUR - 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
COVID-19 Impact: The COVID-19 pandemic has caused a disruption in educational services. The general economic slowdown has reduced the number of jobs available to graduates and resulted in lower salaries being offered in connection with the available employment, affecting 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 bumping up bad debt expenses. Higher default rates may also adversely impact the industry players’ eligibility to participate in some Title IV programs, affecting the companies’ operations and financial condition.
Additionally, extended restrictions and COVID-related border closures, increased competition, advertising inflation, higher expenses for various programs, and shortage of skilled labor are concerning. Higher unemployment levels may prove detrimental to for-profit education companies.
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 are cashing in on the unprecedented surge 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, 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 17-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #225, which places it at the bottom 11% 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 October 2021, the industry’s earnings estimates for 2021 and 2022 have been revised 64% and 16.1% 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 looking 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 71.7% compared with the broader sector’s decline of 10.2%. Meanwhile, the S&P 500 has risen 22.6% 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 18.47X versus the S&P 500’s 21.1X and the sector’s 20.9X.
Over the past five years, the industry has traded as high as 52.1X, as low as 18.5X and at a median of 31.9X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Perdoceo Education: 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 an improvement in enrollment trend at its Colorado Technical University (CTU) segment, partly offset by lower enrollment in its American InterContinental University (AIU) segment. Apart from higher revenues, operating efficiencies at both CTU and AIU along with the DigitalCrafts and Hippo Education acquisitions bode well. The company’s focus on increased investments in technology and student-serving processes drives growth.
Perdoceo Education currently sports a Zacks Rank #2. The stock has lost 18.7% year to date, faring better than the industry’s 72.9% fall. Its earnings estimates for 2021 and 2022 have moved a respective 0.6% and 1.2% up in the past 30 days. This company’s earnings for 2021 and 2022 are expected to grow 3.9% and 6.2%, respectively.
Price and Consensus: PRDO
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. Consistent 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. Also, strong middle and high school Career Learning enrollments, and growth in Adult Learning bode well.
Stride currently carries a Zacks Rank #2. The stock has gained 57.7% so far this year. Its earnings estimates for fiscal 2022 have moved 16.5% up in the past 60 days. The company’s earnings for fiscal 2022 are expected to grow 19.9%.
Price & Consensus: LRN
Bright Horizons Family Solutions: 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.
Bright Horizons currently carries a Zacks Rank #3. The stock has declined 29.8% in the year-to-date period. This company’s earnings for 2021 and 2022 are expected to grow 34.2% and 82.9%, respectively.
Price and Consensus: BFAM
Lincoln Educational Services: 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 working in favor of Lincoln.
Lincoln currently carries a Zacks Rank #3. The stock has gained 11.3% year to date. This company’s earnings for 2021 and 2022 are expected to grow 52.8% and 7%, respectively.
Price and Consensus: LINC
Laureate Education: Baltimore, MD-based higher education programs and service provider has been benefiting from higher enrollment given the recovery of the Latin American higher-education market from the damages caused by the COVID-19 pandemic as well as robust growth from Laureate's investments in new digital capabilities. The company has carried out divestiture programs that drove significant value for shareholders over the years. Its best-in-class digital learning assets and physical footprint in Mexico and Peru have been driving growth. The company expects to carry out a more capital-efficient business model that delivers high-quality education via efficient omnichannel distribution modes.
Laureate Education currently carries a Zacks Rank #3. The stock has declined 30.2% year to date. This company’s earnings for 2021 are expected to grow 168.9%.
Price and Consensus: LAUR
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5 School Stocks Set to Gain Defying Industry Challenges
The companies under the Zacks Schools industry have been facing COVID-related challenges like extended restrictions, higher advertising and marketing expenses along with costs pertaining to online education. 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) , Laureate Education, Inc. (LAUR - 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
COVID-19 Impact: The COVID-19 pandemic has caused a disruption in educational services. The general economic slowdown has reduced the number of jobs available to graduates and resulted in lower salaries being offered in connection with the available employment, affecting 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 bumping up bad debt expenses. Higher default rates may also adversely impact the industry players’ eligibility to participate in some Title IV programs, affecting the companies’ operations and financial condition.
Additionally, extended restrictions and COVID-related border closures, increased competition, advertising inflation, higher expenses for various programs, and shortage of skilled labor are concerning. Higher unemployment levels may prove detrimental to for-profit education companies.
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 are cashing in on the unprecedented surge 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, 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 17-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #225, which places it at the bottom 11% 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 October 2021, the industry’s earnings estimates for 2021 and 2022 have been revised 64% and 16.1% 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 looking 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 71.7% compared with the broader sector’s decline of 10.2%. Meanwhile, the S&P 500 has risen 22.6% 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 18.47X versus the S&P 500’s 21.1X and the sector’s 20.9X.
Over the past five years, the industry has traded as high as 52.1X, as low as 18.5X and at a median of 31.9X, 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 #2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Perdoceo Education: 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 an improvement in enrollment trend at its Colorado Technical University (CTU) segment, partly offset by lower enrollment in its American InterContinental University (AIU) segment. Apart from higher revenues, operating efficiencies at both CTU and AIU along with the DigitalCrafts and Hippo Education acquisitions bode well. The company’s focus on increased investments in technology and student-serving processes drives growth.
Perdoceo Education currently sports a Zacks Rank #2. The stock has lost 18.7% year to date, faring better than the industry’s 72.9% fall. Its earnings estimates for 2021 and 2022 have moved a respective 0.6% and 1.2% up in the past 30 days. This company’s earnings for 2021 and 2022 are expected to grow 3.9% and 6.2%, respectively.
Price and Consensus: PRDO
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. Consistent 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. Also, strong middle and high school Career Learning enrollments, and growth in Adult Learning bode well.
Stride currently carries a Zacks Rank #2. The stock has gained 57.7% so far this year. Its earnings estimates for fiscal 2022 have moved 16.5% up in the past 60 days. The company’s earnings for fiscal 2022 are expected to grow 19.9%.
Price & Consensus: LRN
Bright Horizons Family Solutions: 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.
Bright Horizons currently carries a Zacks Rank #3. The stock has declined 29.8% in the year-to-date period. This company’s earnings for 2021 and 2022 are expected to grow 34.2% and 82.9%, respectively.
Price and Consensus: BFAM
Lincoln Educational Services: 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 working in favor of Lincoln.
Lincoln currently carries a Zacks Rank #3. The stock has gained 11.3% year to date. This company’s earnings for 2021 and 2022 are expected to grow 52.8% and 7%, respectively.
Price and Consensus: LINC
Laureate Education: Baltimore, MD-based higher education programs and service provider has been benefiting from higher enrollment given the recovery of the Latin American higher-education market from the damages caused by the COVID-19 pandemic as well as robust growth from Laureate's investments in new digital capabilities. The company has carried out divestiture programs that drove significant value for shareholders over the years. Its best-in-class digital learning assets and physical footprint in Mexico and Peru have been driving growth. The company expects to carry out a more capital-efficient business model that delivers high-quality education via efficient omnichannel distribution modes.
Laureate Education currently carries a Zacks Rank #3. The stock has declined 30.2% year to date. This company’s earnings for 2021 are expected to grow 168.9%.
Price and Consensus: LAUR