“A Focus On Quality Over Growth In For-Profit Education - Suzanne Stein - Morgan Stanley” |
| A Focus On Quality Over Growth In For-Profit Education - Suzanne Stein - Morgan Stanley Posted: 03 Dec 2010 08:49 AM PST On Friday December 3, 2010, 11:49 am 67 WALL STREET, New York - December 3, 2010 - The Wall Street Transcript has recently published its Education Report offering a timely review of the sector to serious investors and industry executives. This Special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online. Topics covered: Regulatory Risks - Great Buying Opportunities Among Weak Stocks - Economic Recovery and Enrollment Trends - Growth Drivers in Chinese Education Sector - Innovation in Programming and Student Development - Student Quality Over Quantity Companies include: ATA (ATAI); American Public Education (APEI); Blackboard (BBBB); Bridgepoint (BPI); Cambium (ABCD); Capella (CPLA); and many more. In the following brief excerpt from the Education Report, expert analysts discuss the outlook for the sector and for investors. Suzanne Stein is a Securities Analyst who covers the education and analytics companies within Morgan Stanley's business services group. Previously Ms. Stein worked in equity research, covering telecom services at Goldman Sachs. She holds a dual degree in finance and communications from the Wharton School and the College of Arts and Sciences of the University of Pennsylvania, and an MBA from the University of Chicago. In 2009 Ms. Stein was named the top stock picker in specialty retailers and services in the annual Wall Street Journal "Best on the Street" survey. She was also named one of the best brokerage analysts in the consumer discretionary sector in June 2010 by Forbes. TWST: You view Strayer as one of the highest-quality names in the space, yet you're still underweight on the stock. Would you elaborate on your thoughts about that company and its current valuation? Ms. Stein: Our rating on Strayer (STRA), or for any stock in our coverage, does not necessarily reflect what we think of quality; it is more of a relative valuation call. When we put the "underweight" rating on Strayer, our view was that investors were pricing the stock as if it were not exposed to the same regulatory and legislative risk as the rest of the industry, which we do not believe is the case. I guess I took to heart what Senator Harkin said, that maybe there are no good apples. Not that I agree with this statement, but I believe this is how many individuals in Congress and the Department of Education view the sector. They are not distinguishing between Strayer and its peers, and are likely to regulate for-profits as a group, and this will create headwinds for everyone. It's not just going to create headwinds for the ones that people perceive to be lower quality. We changed the rating before the repayment rates were out simply because we felt at a 17 times 2011 p/e multiple there was more risk to the downside. The stock should not have been holding such a premium to the sector. I think there is still risk to the multiple. Repayment rates are low and even if this is a result of loan consolidation, I doubt the Department of Education is going to make material changes to the repayment formula. Also the high use of Pell Grants, which for Strayer was about 30% of students, makes me wonder if its students are that much higher quality than its peers'. Frankly, I am somewhat skeptical of the income numbers management has put out there, given it represents a small sample of Strayer's students. TWST: Given that the whole postsecondary group is being dragged down by these regulatory risks, are there any good deals out there for investors in the form of companies with strong fundamentals that are trading at low prices? Ms. Stein: In the traditional postsecondary for-profit group, there is just no getting around the regulatory risk - they are all exposed. It's not just the regulatory risk, it's the legislative risk that could come after that. The one company that stands out among the postsecondary education companies in my coverage is American Public Education (APEI). The company is different from its peers because the vast majority of its funding comes from the Department of Defense as opposed to the Department of Education. On top of that, it has very low tuition, so even the part of its business that relies on the Department of Education for funding, which is its civilian population, looks good on a relative basis. Recently, the company had a hiccup in its enrollment growth among military students. The stock has had a huge correction as a result. We think these issues may be temporary and you could see significant pent-up demand as a result when things normalize with military deployments, and as a result, enrollment growth. On top of that, they have a new relationship with Wal-Mart (WMT), where they will be the preferred provider of education to employees, and this will start to kick in. TWST: DeVry is the only traditional postsecondary school that you are overweight on. Why is DeVry a good investment, even in this environment? Ms. Stein: There is no denying that DeVry (DV) is exposed to the regulatory issues, from gainful employment and incentive comp; so any way you cut it, DeVry still has a lot of the industry risk. I still believe though that even if you make the adjustments, based on what our assumptions are for gainful employment, you still have a very well-diversified company. This diverse portfolio of schools, programs, degrees will give the company some flexibility as it adjusts to new regulations. The range of end markets it serves points to varying income levels. Even though the repayment rates were disappointing in some schools, I'd expect the company to meet the debt-to-income thresholds for many programs. Its diverse platform means it will be able to focus on programs with headroom to raise tuition, or focus on growing programs with better repayment rates or debt-to-income metrics. The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online . The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations. For Information on subscribing to The Wall Street Transcript, please call 800/246-7673 Follow Yahoo! Finance on ; become a fan on Facebook. This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read our FAQ page at fivefilters.org/content-only/faq.php |
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