For-profit colleges, boosted by demand for job retraining and online education, remain a favorite sector of the advisory community. Ron Baron, Sam Stovall, Gregory Spear, and Jamie Dlugosch review those firms at the top of the class in this growing market.
(For more on the advisors below, please click on their photos.)
"Ron Baron is a skilled stock-picker and fund manager, and over the
years, he's been able to unearth up-and-coming growth stocks before most
investors catch on," notes Don Phillips' Morningstar,
in a report prepared by analyst
Christopher Davis.
"His
strategy is to find companies that can double in price over
the next several years. His portfolios are heavy on consumer-services stocks
such as higher education providers Apollo Group (APOL NASDAQ),
a top-ten holding at Baron Asset fund. Apollo operates
the University of Phoenix, which is home to more than 200,000 adult students
attending its onsite and online classes. 'We have earned more than eight
times our money with Apollo," Baron writes in his quarterly report to shareholders, 'and
we believe we have the opportunity for nearly another triple during
the next five years.' He also likes Universal Technical Institute (UTI
NYSE),
a recent addition to his Baron Growth portfolio. UTI is the nation's largest
provider of auto, motorcycle, diesel, and marine mechanics training. Baron points
out the demand for skilled mechanics is on the upswing, fueled by the
increasing technological sophistication of automobiles. The schools could face less competition from
community colleges, many of which have suffered, thanks to many state
governments' fiscal woes."
"With competition for jobs expected to
stay tight, we forecast a bright future for this for-profit education
outfit Education Management (EDMC
NASDAQ), a for-profit education company best known as the operator
of Art Institutes," says Sam Stovall in S&P's
The Outlook
. "The firm has provided career-oriented education for
over 40 years, and its institutes have over 150,000 alumni.
As of April 2004, it operated a total of
66 primary campus locations, in 24 states and two Canadian provinces. We expect it
to benefit in the years ahead from the opening of new
campuses and from continued strength in its major positions in the
niche areas of art, design, and cooking. In our opinion, Education
Management should also gain as it extends its recent entry into the larger
educational fields of business and health sciences. At the start of
the fiscal 2004 fourth quarter (ending June), total enrollment at Education Management's schools was 57,141 students,
up 37% from a year earlier. As of fiscal 2003 yearend, students enrolled at
16 of the Art Institutes were able to supplement classroom curriculum with online course work. With a p/e-to-growth
(PEG) ratio of only 1.2 based on the 25% EPS gains
we see for the next several years, the stock trades at a large discount to
the S&P MidCap 400. Attaching a PEG of 1.8 to its shares suggests
potential gains for the share price to $52 over the next 12 months. The stock
carries S&P's highest investment recommendation of '5 Star Buy'."
"Career Education (CECO NASDAQ) is the world's largest on-campus provider
of private, for-profit post-secondary education," says Gregory
Spear, editor of The Spear Report
. "The company operates
78 campuses in the US, Canada, France, the United
Kingdom, and the United Arab Emirates offering degrees in visual communication and
design technologies, information technology, business studies, culinary arts, and health education. At the
end of January, its total student population was about 83,200 students; of which
15,600 attend the Online Division (more than three-and-a-half times the year ago figure). First
quarter 2004 new student starts rose 83%. CECO just reported blow-out
earnings, and that is the main reason there is a buzz in the education stocks at
this time. Quarterly revenue was up an astounding 64% to over $400 million, while
net income increased 117% to $41.8 million, or $0.40 per diluted share. The
company also guided 2004 margins higher by 130 to 150 basis points, while still
planning on opening nine new branch campuses this year. Remarkable. And while we
believe it is possible that a bubble may be forming in education stocks, which could
lead to a deep correction in 2005, we think the stock could more than double
from current levels over the next six to 12 months."
"ITT Educational Services (ESI NYSE) provides technology-oriented post-secondary
degree programs in the US," says Jamie Dlugosch, editor of
The Rational Investor
. "The company has graduated over 175,000
students since 1976 and is poised to experience strong growth given the
increased demand for specialized post-secondary educational options. The entire educational sector
has been experiencing explosive growth and the market has taken notice. The educational
industry is clearly an industry with wonderful profit potential. With most of
the expected profit potential priced into the stocks, I have been waiting for an
opportunity to buy into the sector at a discount. That chance has arrived with
the announcement from the Federal authorities that it was investigating the
company’s accounting practices and student enrollment. Share prices tumbled
following the news. At current prices the company is extremely undervalued
relative to its peers, even when you take into account an uncertainty discount.
The company has not been indicted for any wrongdoing and management has been
cooperating fully with investigators and is considering a stock buyback in
support of current shareholders. Like many things, fear has taken hold and the
selling has been overdone. Our target for ESI is $70."
