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Schools Industry Outlook: Bullish on New Regulations

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The Zacks Schools industry comprises for-profit education companies that offer undergraduate, graduate and specialized programs in the areas of finance, accounting, analytics, marketing, healthcare, business and technology. 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, and conduct workshops and teacher training programs.

Let’s take a look at the industry’s three major themes:

  • A lower unemployment level and higher disposable income are working in favor of for-profit education companies. An improving business climate under the Trump administration seems to be the biggest catalyst for the industry. The new for-profit education regulations — for the Borrower Defense to Repayment (“BDR”) and Gainful Employment (“GE”) system introduced during Obama’s tenure — also bode well for the industry participants. The U.S. Department of Education’s new borrower defense regulations significantly raise the bar for student borrowers seeking debt forgiveness based on claims that they were defrauded by their colleges. Meanwhile, the U.S. Education Department finalized its repeal of an Obama-era regulation that threatens to cut off federal student aid to vocational programs whose graduates consistently have high loan payments relative to their income.
  • This apart, 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.
  • On the flip side, the growth of the industry may be hindered by legal and regulatory issues faced by postsecondary schools in the United States, increased competition, higher expenses for various programs, and shortage of skilled labor.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Schools industry is an 16-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #66, which places it at the top 26% 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, 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 as well as the Zacks S&P 500 composite over the past year.

The stocks in this industry have collectively gained 23.1% versus the broader sector’s growth of 3.1%. Meanwhile, the S&P 500 has gained 7.8%.

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 27.4X versus the S&P 500’s 17.2X and the sector’s 18.3X.

Over the past five years, the industry has traded as high as 38X, as low as 15.5X and at the median of 28X, as the chart below shows.

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

Bottom Line

The current economic scenario, business climate and new regulations bode well for the industry’s growth in the near term. Moreover, for-profits education companies are forging corporate and community college partnerships to educate their workforce. Prudent cost management and continued focus on driving profitability, along with the strategic initiatives, are also expected to boost the industry’s growth.

Here we present four stocks from the for-profit education industry, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Career Education Corporation : Schaumburg, IL based educational services currently carries a Zacks Rank #1. The company has an expected earnings growth rate of 19.1% for the current year. Over the past 30 days, the Zacks Consensus Estimate for 2019 EPS has risen 9.6%.

Price and Consensus: CECO

Lincoln Educational Services Corporation (LINC - Free Report) : Headquartered in West Orange, NJ, this company provides career-oriented, post-secondary education services to high school graduates and working adults in the United States. The stock currently carries a Zacks Rank #2 and has an expected earnings growth rate of 155.6% for the current year.

Price and Consensus: LINC

K12 Inc. (LRN - Free Report) : Headquartered in Herndon, VA, this technology-based education company provides online educational services in the United States and internationally. The stock carries a Zacks Rank #2. It has a three-five year expected EPS growth rate of 15%.

Price and Consensus: LRN

Laureate Education, Inc. (LAUR - Free Report) : Baltimore, MD-based company is the provider of higher education programs and services to students through a network of universities and higher education institutions. The stock carries a Zacks Rank #2 and the consensus EPS estimate for the company has increased 25.1% to $5.03 for 2019, over the past 60 days. It has a three-five year expected EPS growth rate of 12%.

Price and Consensus: LAUR

Investors might prefer holding on to the following stock with impressive growth prospects.

Strategic Education Inc. (STRA - Free Report) : Headquartered in Herndon, VA, this post-secondary education provider carries a Zacks Rank #3 (Hold). The company has an expected earnings growth rate of 39.8% for the current year.

Price and Consensus: STRA

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