For-profit education companies have been on the radar since the victory of Donald Trump, as less arduous regulatory environment was assured for such companies during his campaign.
In June 2017, the U.S. Department of Education made announcements to revise for-profit education industry regulations. The department expressed its intention to form a committee to rewrite the Borrower Defense to Repayment and Gainful Employment system, intended to protect students from misleading advertisements of programs and high debt burden.
The Obama administration had revised the regulation last year in order to simplify the debt relief claims process and shift the loan burden more onto schools. These were slated to be put into effect in July 2017, but the U.S. Secretary of Education Betsy DeVos deferred the implementation for a year.
DeVos is of the view that the current regulation “is a muddled process that's unfair to students and schools, and puts taxpayers on the hook for significant costs.” She assured that the revised regulations will be fair and balanced for educational companies and will also protect students from fraudulent practices and deceptive claims.
DeVos’ decision to delay the implementation till July 2019 led to a legal protest against her by a group of 19 state attorneys general. Critics believe that the revised rules are more in favor of “predatory” for-profit education companies than loan-burdened students. Also, the fact that not a single debt relief claim has been approved since DeVos took office has enraged critics all the more.
In the Spotlight
Among other developments, two key players in the industry — Strayer Education Inc. STRA and Capella Education Inc. — agreed to an all-stock merger in a deal valued $1.9 billion. The combined company will be named "Strategic Education Inc." and will trade under the ticker symbol STRA. The deal announcement came at a time when the for-profit school industry is grappling with market challenges and tougher regulations. Enrollments have been sluggish due to stringent laws, and intensifying competition. The combined entity is expected to ensure student success and positive employment outcomes.
Meanwhile, for-profit education companies are coming up with ad campaigns, investing in digital capabilities and stepping up social media efforts to enhance brand value as well as boost enrollment. Additionally, companies are improving their technology and infrastructure, increasing investments to improve the academic quality and retain students, buying complementary businesses and regularly introducing new programs and specializations to boost student outcome.
Investors are taking notice of the positive changes in the industry and for-profit school stocks are witnessing a strong rally under Trump and DeVos. The Zacks School Industry rallied 41.9% year to date, outperforming the S&P 500’s gain of 15.7%. Also, a solid industry rank (among the top 34% out of 265 industries) signals that the companies in this space are likely to benefit from favorable broader factors in the immediate future.
4 Stocks to Bet On
Keeping the positive momentum in mind, we zeroed in on some for-profit education stocks that have gained in the current mixed scenario and have the potential to grow further. With the help of the Zacks Stock Screener, we have handpicked four for-profit education stocks based on a good Zacks Rank and other relevant metrics.
American Public Education, Inc. APEI is an online provider of higher education focused primarily on serving the military and public service communities. Shares of American Public Education returned 29.5% in the last three months, outperforming its industry growth of 1.5%. In the last 60 days, the Zacks Consensus Estimate for earnings increased 2.9% for 2017 and 5.3% for 2018. The positive earnings estimate revisions indicate analysts’ confidence and substantiate the Zacks Rank #1 (Strong Buy) for the stock.
Grand Canyon Education, Inc. LOPE is a provider of online postsecondary education services. Shares of Grand Canyon returned 13.6% so far this year, outperforming its industry.
The company has a solid three-five year EPS growth rate of 13% and a ROE of 21.4% (higher than the industry’s 5.5%). This earnings momentum is likely to continue in the near term, as reflected by the company’s projected EPS growth of 22.6% for the current year (higher than the industry average of 13.7%). Revenues are expected to grow 10.9% this year.
In the last 30 days, the Zacks Consensus Estimate for earnings increased 1.3% for 2017 and 1% for 2018. The stock holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Bright Horizons Family Solutions Inc. BFAM provides employer-sponsored child care, early education and work/life solutions.
Shares of Bright Horizons returned 8.6% in the last three months, outperforming its industry. The stock holds a Zacks Rank #2. Bright Horizons has a solid three-five year EPS growth rate of 20% and boasts a ROE of 19.7%. The company’s earnings is expected to grow 15.3% for the current year and 13.3% for the next. Revenues are expected to improve 10.7% this year.
In the last 30 days, the Zacks Consensus Estimate for earnings inched up 0.4% for 2017 and 0.3% for 2018.
TAL Education Group TAL is a leading K-12 after-school tutoring service provider in China. Shares of the company returned over 100% year to date, outperforming its industry. The stock holds a Zacks Rank #2.
TAL Education has a solid three-five year EPS growth rate of 58.1% and a ROE of 18.2%. The company’s earnings is expected to grow 68.2% for fiscal 2018 and 72.3% for fiscal 2019. Revenues are expected to rise 63.6% in fiscal 2018.
In the last 30 days, the Zacks Consensus Estimate for earnings increased 8.8% for fiscal 2018 and 8.5% for fiscal 2019.
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