Back to School

05/14/2004 12:00 am EST

Focus:

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.)

Phillips, Don"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."

Stovall, Sam"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'."

Spear, Gregory"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."

Dlugosch, James"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."

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