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Zacks Industry Outlook Highlights Bright Horizons Family Solutions, Grand Canyon Education, Strategic Education, Adtalem Global Education and American Public Education

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For Immediate Release

Chicago, IL – October 12, 2023 – Today, Zacks Equity Research discusses Bright Horizons Family Solutions Inc. (BFAM - Free Report) , Grand Canyon Education, Inc. (LOPE - Free Report) , Strategic Education, Inc. or SEI (STRA - Free Report) , Adtalem Global Education Inc. (ATGE - Free Report) and American Public Education, Inc. (APEI - Free Report) .

Industry: Schools


The popularity of e-books, online learning in the country, increasing demand for healthcare professionals, 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 challenges like higher advertising and marketing expenses along with costs pertaining to online education. Also, the advancement of generative artificial intelligence (AI) systems is a significant threat.

That said, 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., Grand Canyon Education, Inc., Strategic Education, Inc. or SEI, Adtalem Global Education Inc. and American Public Education, Inc.. 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 fields 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 conducting workshops and teacher training programs.

3 Trends Shaping the Future of the Schools Industry

Rising Demand for Online Education & Healthcare Professionals: 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.

Meanwhile, healthcare and global institutions have been making substantial contributions to the companies' financial success. The U.S. healthcare sector is presently grappling with a pronounced shortage of skilled professionals, which is posing a significant risk to the quality of care and further exacerbating health disparities across the country. The companies have designed their programs to be rigorous and well-suited to address the workforce needs of the healthcare industry. Industry stakeholders also anticipate a future where the demand for healthcare professionals will outstrip the available supply.

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 such as 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, Generative AI systems: 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 the 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.

Increased competition, higher expenses for advertising and various programs, and a shortage of skilled labor are concerning. Higher unemployment levels may prove detrimental to for-profit education companies.

Importantly, generative AI systems have the remarkable ability to generate highly sophisticated textual outputs based on brief human prompts. Major tech companies are in fierce competition to create superior versions of this technology, and the rapid advancements in generative AI pose a potential threat to the new customer growth rate of educational companies. The emergence of AI could disrupt the traditional business models of the industry players.

Zacks Industry Rank Indicates Bright 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 #158, which places it at the top 37% 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 positioning in the top 50% of the Zacks-ranked industries is a result of a higher 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 July 2023, the industry's earnings estimates for 2023 have increased 2.9%.

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 48.2% compared with the broader sector's rise of 16.1%. Meanwhile, the S&P 500 has gained 21.5% in the said period.

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 22.2X versus the S&P 500's 18.5X and the sector's 16X.

Over the past five years, the industry has traded as high as 66.3X, as low as 14.6X and at a median of 31.4X.

5 School Stocks to Keep an Eye On

Below, we have discussed five stocks from the industry that currently has a Zacks Rank #2 (Buy) or 3 (Hold) and 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. Solid contributions from Chamberlain and the Medical and Veterinary segments added to the tailwinds. ATGE remains well-positioned to gain from the growing demand for nurses and other healthcare professionals and their increasing roles in the healthcare industry.

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 earnings per share (EPS) growth over the long term.

ATGE, carrying a Zacks Rank #2, has seen an upward estimate revision for fiscal 2024 earnings to $4.31 per share from $4.28 over the past 60 days. The stock has climbed 20.2% over the past year and 29.3% year to date (YTD). This company's earnings for fiscal 2024 are expected to grow 2.4%. Its earnings topped consensus estimates in all the trailing four quarters, with the average surprise being 22%.

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 an 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 #2. The stock has lost 54.7% over the past year and 60.8% YTD. Although the company's loss estimates have widened, the same for 2024 has increased to earnings of a cent from a loss of six cents per share over the past 60 days. This depicts analysts' optimism over the stock's growth potential. The bottom line for 2023 and 2024 shows an improvement of 41% and 110.2% growth from a year ago.

Strategic Education, Inc. or SEI: Based in Herndon, VA, SEI delivers educational services through both traditional campus-based learning and online post-secondary education, along with programs designed to equip individuals with job-ready skills. The company is likely to benefit from a strong demand environment, improved enrollment trends and strong revenue per student. Also, focus on digital learning platforms, competency-based learning models and direct assessment capabilities bodes well.

The company is focusing on providing programs based on a competency-based learning model and direct assessment capabilities. One of these innovations is FlexPath. FlexPath continues to be one of the company's fastest-growing programs, as it allows students to focus on leveraging their skills and knowledge gained during professional hours.

STRA currently carries a Zacks Rank #3. The stock has gained 29.3% over the past year and 4.5% YTD. STRA has seen an upward estimate revision for 2023 and 2024 earnings to $3.21 per share and $4.22 per share from $3.18 and $4.15 over the past 60 days. The company's earnings for 2023 are expected to register 27.9% growth, and the same for 2024 are expected to grow 31.5% year over year. Its earnings topped consensus estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 12.1%. Moreover, its three-to-five-year expected EPS growth rate is currently pegged at 18.9%.

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 traditional campus enrollments and higher revenue per student.

Grand Canyon Education currently carries a Zacks Rank #3. The stock has gained 41.4% over the past year and 10.3% YTD. This company's earnings for 2023 are expected to register 12.1% growth from a year ago. Again, it carries an impressive VGM Score of A. Its earnings topped consensus estimates in all the trailing four quarters, with the average surprise being 10.1%. Moreover, its three-to-five-year expected EPS growth rate is currently pegged at 15%.

Bright Horizons Family Solutions: Based in Newton, MA, this company is a leading provider of high-quality education and care solutions. While the labor market for early childhood teachers remains tight, the company has been witnessing improved occupancy rates and solid contributions from the backup care segment. The Bright Horizons' existing centers are witnessing increased enrollments and price hikes. In addition to this, the acquisition of 75 centers in Australia in July 2022 and the broader utilization of its backup care and educational advisory services are driving growth.

Bright Horizons currently carries a Zacks Rank #3. The stock has gained 32.1% in the YTD period. This company's earnings for 2023 and 2024 are expected to grow 4.2% and 34.2%, respectively. Its earnings topped consensus estimates in all the trailing four quarters, with the average surprise being 11.6%. Moreover, its three-to-five-year expected EPS growth rate is currently pegged at 17.1%.

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