Over the last several months a number of the for-profit education companies have come into review. I would like to lead an industry study to evaluate a number of them and possibly arrive at a decision of which one is best. It's possible it won't be a buy right now but it would be the one to watch. I'd like to start with SSG's of each then move into company reviews (possibly aided by the Bob Adams spreadsheet) and an industry discussion.
Which companies should be included?
Strayer (STRA), Apollo (APOL) and ITT Educationsl Services (ESI) come to mind.
Bob Mann
There is nothing - absolutely nothing - half so much worth doing as simply messing around in boats
Using Bob Adams' spreadsheet, recently discussed here on the forum <VBG>, I identified competitors: STRA, APOL, ESI, DV, COCO and CECO.
CPLA provides education services so, even though not listed as a competitor by any of the other six companies, let's keep it on the list.
MHP is a publisher - think textbooks - so, while involved in the education process, it si not part of the for-profit education industry.
Let's look at the ssg's of each of these companies in alphabetical order. First up, APOL.
For APOL, I see that the graph is relatively straight, rising, and more-or-less parallel (primarily excluding 2004). At roughly $4 billion in annual sales, they are at the upper end of mid-caps. Their debt ratio is listed as 33.7%; we'll want to compare that to the competitors ratios to see what an industry average is.
Using the revenue-based estimator I came up with 18 and 19.7. Analysts' estimate is for EPS of 9.24, or 17%. Clicking in judgement 1 box in Toolkit reveals analysts' growth estimates of 15%, even lower still, which is what I went with.
Management has seen an approximate 20% drop in profit margin from 2003-2008, before finally going up again last year. The recent increase was enough to show "up" as the trend. Beginning ROE has increased every year since 2005.
I see a decreasing trend in both high and low PE so I used 21 and 11 in section 4, giving me a calculated low price of $46.30. The buy range extends up to $79.30 so the current price of $54.54 is definitely in the buy range. The US/DS comes in at 15:1. Projected compound return is 26.7%.
The relative value is lower than I like (rising to 66% if I remove three values as outliers) so we need to look a little closer at the whole industry to see if there are industry problems vs corporate problems.
Reviewing PERT-A, profit margins (col N) are good, as are TTM values in cols. R,S,T. In fact, the TTM values have been rising consistently since their bottom in 02/07.
Other than further research into Relative Value, I have this company as a buy. To recap, my judgements were 15 and 15 in section 1, 21 and 11 for high/low PE in section 4, with calculated low price of $46.30. US/DS is 15:1 and TR is 26.7.
How does this compare to what you have? Let's discuss this some before we move on to CECO.
Bob
I think one has to be cautious when evaluating APOL due to the SEC investigation of their revenue recognition practices. Here is a link to what was announced on 10/27. I have not seen any further clarification since that time. The chart here shows that since the announcement the stock price has declined sharply about 28%. Thus is seems the future value of APOL will depend heavily upon what the SEC investigation reveals that is not at all clear to me at this point.
Dan
Both articles are very sobering and paint the industry in a bad light. Time will tell if it's an industry problem or an Apollo problem. This shows how the ssg can't always be taken simply by itself and how, sometimes, the "other 20%" is much more important than the ssg itself. Usually when this happens it's time to stand back and watch from the sidelines.
However, if we want to be prepared for what comes out of this "informal investigation" we need to analyze all the companies with what information we know now, so that we can quickly update them as warranted by the results of the investigation.
Any other thoughts on Apollo, either their ssg or the company?
Very interesting and important point, to be sure.
Next on the list is CECO.
Their visual analysis looked great through 2005. It is only within the last three quarters that the company looks like it has started to rebound from 2005-2008. Is it enough? I'm not sure, but looking at their declining profit margin for the past 5 years is enough to get me to stop, right now.
Alphabetically, the next company is COCO.
Their visual analysis looked great through 2004. For the next three years, sales growth slowed while PTP and EPS plummeted. For the past two-plus years, the graph has started to rise again, with PTP and EPS rising at a tandem but much faster pace than sales. I used 16 and 16 for my growth estimates. When looking at section 2A, one can again see this slowing in PTP as the profit margin tracks to it. With this UP trend, it appears that COCO's management has responded accordingly and is getting the company back on track.
I used 27 and 12 as high/low PE, 1.12 as low EPS, generating a low price of 13.4. This made the buy range 13.4 - 25.9; the current price of 15.78 generates an US/DS of 20:1 and a total return of 32.1. The primary concern, again, is the low relative value of 61%, after eliminating a few outliers in section 3.
Looking at PERT-A, I see profit margin (col N) has sky-rocketed to 11.5 for the current TTM period vs 4.5 a year ago. Cols R,S,T show % change in EPS, PTP and sales has reason for 10 straight TTM periods, or 2.5 years. This is again what we saw in visual analysis.
I have COCO as a buy according to the ssg, if I can be comfortable with the low Relative Value.
What do you have/think about COCO's ssg?
No comments on COCO so on to DV.
The semi-log graph in section one shows a nice rise starting in 2005. PTP is getting closer to Sales which indicates a decrease in expenses (good news). Earnings are growing almost in parallel with PTP. I chose to go with 14% for Sales (rate from 2005-08) and 14.3% for EPS (using revenue-based estimate). Profit margins (2A) are definitely on the rise.
In section 3 I eliminated 2005-2006 as outliers. This produced a Relative Value of 84.6% which is close enough to my standard low of 85% to accept it. High and Low PEs are showing definite signs of lowering over the years. I used values just under last years, 26 and 15. Calculated low price is $39.30 and high price is $132.90, with a buy range up to $62.70. The current price of $54.47 produces an US/DS of 5.2:1. The compounded rate of return is calculated as 19.5%. My three buy criteria are met: RV of 85-100%, US/DS > 3:1, and TR > 14.9%. Next, a quick peek at PERT-A to check for hidden issues.
The TTM profit margin (col N) continues to show increasing values (since June 2005) as do TTM Sales, PTP and EPS. I have DV as a buy.
Your thoughts on DV?
Eric, thank you for participating! If I change my sales and EPS growth estimates to 9 and 9.3, it is no longer a buy for me as the TR is now 14.7.
If nobody else has anything, let's move on to the next company. Actually, it's backwards as I skipped CPLA.
CPLA has a nice Visual Analysis graph although with only 5 years of data; but, that meets the BI minimum requirement! The Sales plot is very straight at 23.3% and EPS has been growing pretty consistantly at over 40%. The company's annual sales are about $350 million so this is a small company. I used 17 and 17 for section one estimates. 2A has been rising every year although ROE has been decreasing each year.
For five years of data, there are only 3 high and low PE values. I chose to go with twice my earnings estimate for the high PE and one times my earnings estimate for the low PE. The current TTM EPS value of 2.28 calculates to a low price of $38.80. This comes out to a buy range of 38.80 to 71.60. The current price of 71.05 is just within this range and the US/DS is 3.1:1. The calculated total return is 19.1, which is also good. However, the relative value is 108% which exceeds MY range of 85-100. This is the only negative I have on them from the SSG.
How does your SSG compare? Anything else to know about the company?
I also used 17% for both sales and EPS growth. I also used 17 for my average low P/E, but 27 for my average high. I prefer to be more conservative here and limit average high P/E’s to 30. But I can’t find any fault in using 34 as you did. Using my lower High P/E of 27 puts CPLA just above my buy range, as usual.
Capella is unique in the for profit education industry in that it only operates on line. It has no physical campuses. That should give it an advantage over competitors by keeping expenses down and margins higher. It also gives the company more flexibility with its faculty since they aren’t limited to a certain time schedule. Many teachers also teach at other colleges.
However, there is plenty enough competition in on line education. Most of the other for profit colleges also offer on line classes, as well as many public colleges.
Eric
(Edited to remove problem with the html.)
Nearly done! ESI then STRA.
ESI. The S&P quality rating is B+; their debt is at 45.6%, which is pretty high. What is the reason for it?
The Visual Analysis shows one of the nicer looking graphs I've seen in a while. Dragging the PTP plot onto EPS shows plots close enough for me to call parallel. Their growth is faster than that of Sales, meaning their still cutting expenses. Since this can't go on forever, I would keep my EPS estimate very close to or capped at the Sales growth rate. The historical growth rate for Sales is 13.8. The line is so straight that I'll keep that number. Historical EPS is at 30.8%, which is too rich for me! Analysts' projections are 17% so I'm going to go with 14.5%. This is slightly higher than Sales (just enough to reflect the reality of the historical rate growing faster than Sales) but less than the analysts.
We can see in 2A that management has been increasing profit margin for nearly 9 years. A very enviable record!
We can see the results of the recession on the high and low PE, down 40% or so from fiscal 2007. I went with 20 and 8 for high and low PE, rounding down on both of the most recent values. The price range is 56.60 - 278.20, with the buy range stopping at 112.00. The current price of just under $100 puts it into the buy range. US/DS is 5.4:1 and Total Return is 25.0%. PERT shows increasing values for the last 5 TTM periods.
I have ESI as a buy at the current price. Questions: 1) why the high debt level? 2) any skeletons in the closet?
