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3 School Stocks Set to Gain Despite Industry Headwinds

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The popularity of e-books, online learning in the country, the launching of new technologies and prudent acquisitions for enlarging its global reach has been resulting in the multifaceted growth of the U.S. education industry. Although the companies in the Zacks Schools industry have been facing COVID-related challenges like higher advertising and marketing expenses along with costs pertaining to online education, the companies’ prudent cost management, persistent focus on driving profitability and strategic initiatives are expected to lend support to some prominent players in this industry like Stride, Inc. (LRN - Free Report) , Adtalem Global Education Inc. (ATGE - Free Report) and Perdoceo Education Corporation (PRDO - Free Report) . Also, for-profits education companies are forging corporate and community college partnerships to educate their workforce.

Industry Description

The Zacks Schools industry comprises for-profit education companies that offer undergraduate, graduate and specialized programs in 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, as well as conduct workshops and teacher training programs.

3 Trends Shaping the Future of Schools Industry

Rising Demand for Online Education: 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 in demand for online education.

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 and 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.

Higher Rates & COVID-19 Impact: The Federal Reserve’s hawkish stance, comprising a series of rate increases to combat inflation, is making a slew of debt offerings, including new mortgages, credit cards and some student loans, more expensive. Although federal student loans are doled out at a fixed rate, private loans come with variable rates that have been edging up since the latest Fed rate hikes.

The COVID-19 pandemic has caused a disruption in educational services. There are headwinds as inflationary pressures, a tight labor market and ongoing supply chain issues continue to impact business. 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 a shortage of skilled labor are concerning. Higher unemployment levels may prove detrimental to for-profit education companies.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Schools industry is a 16-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #90, which places it at the top 36% 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 impressive 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.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector, Lags S&P 500

The Zacks Schools industry has outperformed the broader Zacks Consumer Discretionary sector but lagged the Zacks S&P 500 composite over the past year.

The stocks in this industry have collectively lost 30.3% compared with the broader sector’s decline of 35.2%. Meanwhile, the S&P 500 has slipped 7.9% 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 47.95X versus the S&P 500’s 17.95X and the sector’s 18.04X.

Over the past five years, the industry has traded as high as 61.86X, as low as 13.55X and at a median of 32.73X, as the chart below shows.

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

3 School Stocks to Keep a Close Eye on

Below we have discussed two 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.

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. Apart from strong free cash generation and cash position that provide financial flexibility to reinvest organically, its businesses pursue strategic disciplined acquisitions that drive growth.

Stride currently carries a Zacks Rank #2. The stock has gained 28.1% so far this year, faring better than the industry’s 6.1% fall. The company’s earnings for fiscal 2023 are expected to grow 6.7%.

Price & Consensus: LRN

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. Although the company has been experiencing lower enrollment owing to pandemic-related headwinds, the company’s focus on increased investments in technology and student-serving processes as well as the acquisition of California Southern University bodes well.

Perdoceo Education currently carries a Zacks Rank #2. The stock has gained 3.8% year to date (YTD). Although this company’s earnings for 2022 are expected to decline 18.8% due to lower enrollment and higher investments, the same for 2023 are expected to grow 5.8%.

Price and Consensus: PRDO

Adtalem Global Education: This Chicago, IL-based company provides educational services worldwide. Despite the pandemic's adverse impact on organic revenue growth, the company’s margins have been expanding across the business owing to operational efficiency and realization of cost synergies associated with the Walden integration. Adtalem’s post licensure nursing programs, strategic focus, significant scale and buyout synergies have positioned it well in helping the healthcare industry meet its critical workforce talent needs.

This Zacks Rank #3 stock has climbed 32.1% YTD. Adtalem’s earnings for fiscal 2022 and 2023 are expected to grow 9.1% and 38.5%, respectively.

Price and Consensus: ATGE

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Stride, Inc. (LRN) - free report >>

Adtalem Global Education Inc. (ATGE) - free report >>

Perdoceo Education Corporation (PRDO) - free report >>

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