Back to top

Image: Shutterstock

5 School Stocks to Register Gains From a Buoyant Industry

Read MoreHide Full Article

The popularity of e-books, online learning in the country, the launch of new technologies and prudent acquisitions for a wider global reach have been resulting in the multifaceted growth of the U.S. education industry. However, 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. That said, 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 PowerSchool Holdings, Inc. (PWSC - Free Report) , Grand Canyon Education, Inc. (LOPE - Free Report) , Adtalem Global Education Inc. (ATGE - Free Report) , Stride, Inc. (LRN - Free Report)   and American Public Education, Inc. (APEI - Free Report) . Also, for-profit 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 the Schools Industry

Rising Demand for Online Education: For-profit education stocks have been reaping benefits from the rise in the 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 the use of technology in education, more investments in education, and the regular introduction of programs and specializations should boost student outcomes. Tie-ups with different organizations to reduce exposure to Title IV funding, improve academic quality and retain students also bode well. Many for-profit education companies are investing in non-degree programs and designing programs 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.

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 #47, which places it at the top 19% 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 & S&P 500

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

The stocks in this industry have collectively gained 17.6% compared with the broader sector’s decline of 21.3%. Meanwhile, the S&P 500 has slipped 8.7% in the said period.

One-Year Price Performance

Industry's Current Valuation

On the basis of the 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 23.7X versus the S&P 500’s 18.5X and the sector’s 18.9X.

Over the past five years, the industry has traded as high as 64.1X, as low as 14.1X and at a median of 32X, as the chart below shows.

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

5 School Stocks to Watch Now

Below, we have discussed five stocks from the industry that currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). We have also selected three stocks with a Zacks Rank #3 (Hold) that have solid growth potential. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Adtalem Global Education: This Chicago, IL-based company is a leading healthcare educator that partners with many organizations to address future workforce needs with access to academic curriculums, certifications and training programs across the medical and healthcare industries. Despite the pandemic's adverse impact on enrollment growth, the company has been able to expand margins across the business owing to operational efficiency and the realization of cost synergies associated with the Walden integration. The company follows a strict cost-control routine, with special emphasis on controlling and escalating costs at some of its institutions. Also, tie-ups and collaboration with different organizations are allowing Adtalem to reduce exposure to Title IV funding. The company believes that its portfolio management approach and effective cost management will help drive sustainability in revenues and EPS growth over the long term.

ATGE has seen an upward estimate revision for fiscal 2023 earnings to $4.05 per share from $4.04 per share over the past 30 days. The stock has climbed 70.7% over the past year. This Zacks Rank #1 (Strong Buy) company’s earnings for fiscal 2023 is expected to grow 25%.

Price and Consensus: ATGE

Stride: Headquartered in Herndon, VA, this technology-based education company has been gaining from higher enrollment, increases in revenue per enrollment, and Adult Learning growth. 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 #1. The stock has gained 22.9% over the past year. The company’s earnings for fiscal 2023 are expected to decline 0.4%.

Price and Consensus: LRN

Grand Canyon Education: This Phoenix, AZ-based company is an education services provider to colleges and universities in the United States and has developed key technological solutions, infrastructure and operational processes to deliver superior services in these areas on a large scale. The company has been benefiting from an increase in the Grand Canyon University (GCU) traditional campus enrollments and higher revenue per student. Also, the company has been working with GCU on two main strategies (B2B and the rollout of new and relevant programs) to offset the downturn in online enrollment.

Grand Canyon Education currently carries a Zacks Rank #3. The stock has gained 43.9% over the past year. This company’s earnings estimate for 2023 is expected to register 8.6% growth from a year ago.

Price and Consensus: LOPE

PowerSchool Holdings: Based in Folsom, CA, PowerSchool provides cloud-based software to the K-12 education market. PowerSchool is one of the leaders in providing mission-critical solutions to the growing online K-12 schooling market. Growing pipeline and demand for the company’s differentiated unified platform of best-in-class solutions will benefit PowerSchool in generating revenues for the near term. Also, cross-/upselling activity continues at a robust pace, with more than 500 transactions in the third quarter. Management is witnessing a variety of sales progressions across product types.

PowerSchool currently carries a Zacks Rank #3. The stock has gained 31.2% over the past year. The company’s earnings for 2023 are expected to grow 10.7%.

Price and Consensus: PWSC

American Public Education: Based in Charles Town, WV, APEI provides online and campus-based postsecondary education. American Public has been undertaking initiatives like affordable tuitions, online programs, strategic efforts to improve student success and strong digital marketing campaigns that are helping it in driving growth. Increased demand for affordable online higher education and nursing programs bodes well for American Public. The APUS segment has been benefiting from the increase in military-related registrations from students utilizing TA and improvements made by the Army to the ArmyIgnitED system.

APEI currently carries a Zacks Rank #3. The stock has lost 28.9% over the past year. Nonetheless, this company’s earnings estimate for 2023 is expected to register 107.2% year-over-year growth.

Price and Consensus: APEI

Published in