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Schools Industry Holds Great Potential to Prosper

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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 drop in unemployment level and higher disposable income are working in favor of for-profit education companies. Also, an improving business climate under the Trump administration seems to be the biggest catalyst for the industry.
     
  • Apart from this, 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, growth in the industry may be impeded 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 17-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #114, which places it at the top 45% 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.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since January 2020, the industry’s earnings estimate for 2020 has gone up approximately 11.6%.

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 25.6% versus the broader sector’s growth of 6.6%. Meanwhile, the S&P 500 has gained 14.7%.

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 30.9X versus the S&P 500’s 18.4X and the sector’s 19.6X.

Over the past five years, the industry has traded as high as 38X, as low as 15.5X and at the median of 28.1X, 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 strategic initiatives are 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.

Universal Technical Institute, Inc. (UTI - Free Report) : This Scottsdale, AZ-based technical education service provider currently carries a Zacks Rank #1. The company has an expected earnings growth rate of 125% for the current year. Over the past 30 days, the Zacks Consensus Estimate for its fiscal 2020 EPS has risen 44.4%.

Price and Consensus: UTI


Adtalem Global Education Inc. (ATGE - Free Report) : This Chicago, IL-based educational service provider offers a wide array of programs across medical and healthcare, financial services, and business and law. Over the past 30 days, the Zacks Consensus Estimate for this Zacks Rank #2 company’s fiscal 2020 EPS has moved up 0.4%.

Price and Consensus: ATGE


GP Strategies Corporation (GPX - Free Report) : Headquartered in Columbia, MD, this company provides performance improvement and learning solutions worldwide. It carries a Zacks Rank #2 and has an expected earnings growth rate of 71.1% for 2020.

Price and Consensus: GPX


Investors might also prefer holding on to the following Zacks Rank #3 (Hold) stocks with impressive prospects.

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 company has an expected earnings growth rate of 150% for 2020.

Price and Consensus: LINC


Strategic Education Inc. (STRA - Free Report) : Headquartered in Herndon, VA, this post-secondary education provider has an expected earnings growth rate of 11.5% for 2020.

Price and Consensus: STRA




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