Apple earns its stripes Making money in school stocks Will a pickup in the job market lead to failing grades for education stocks on Wall Street? March 28, 2005: 1:58 PM EST By Paul R. La Monica, CNN/Money senior writer NEW YORK (CNN/Money) – With the labor market relatively lackluster for the past year, you would expect more people to head back to school to improve their chances of landing a better job. That thinking was a main reason why shares of many publicly traded education companies received gold stars from Wall Street at the beginning of 2004. But such companies haven't lived up to the "Most Likely to Succeed" billing. For example, shares of Apollo Group (Research), Corinthian Colleges (Research), Career Education (Research) and DeVry (Research) are down an average of more than 30 percent during the past 12 months. What gives? Although the job market hasn't exactly sprung to life, investors have been betting that it has to eventually -- and that enrollment for continuing education would suffer. In addition, some companies in the group have faced increased legal and regulatory scrutiny during the past few months. Even so, several analysts argue that concern over both issues is overdone. We don't need no education? The number of jobs added in February was ahead of expectations and economists predict that a healthy 220,000 jobs were added in March. That report is due Friday. Trace Urdan of Robert W. Baird & Co. is one analyst who thinks that -- when it comes to education stocks -- the market pays too much attention to the labor market. He notes that consolidation of small mom-and-pop colleges and demand for online education can continue to drive growth. As such, industry leader Apollo is expected to post extremely strong fiscal second quarter results on Tuesday, with gains of approximately 30 percent in revenues and earnings. And for the next few years, analysts expect profits to rise at a 25 percent clip annually. Estimated long-term growth rates for others in the industry are similarly strong. Career Education is expected to see its earnings grow at a 25 percent rate for the next five years and consensus forecasts call for 20 percent earnings increases for Corinthian Colleges, Strayer Education (Research) and Education Management (Research). Richard Close, an analyst with Jefferies & Co. notes that the skyrocketing costs of private colleges also bodes well for this group, drawing younger students looking to go to college, as opposed to just workers looking to go back to school. "Demographics are still favorable," said Close. "There is strong projected growth through the next five years thanks to the increased number of individuals in the prime age to go to college. There is definitely a role for these companies going forward," said Close. Nonetheless, Wall Street still perceives the group as being a better play when more people are out of work. And that might be all that matters for the shares in the short-term. A stronger than expected jobs report on Friday could send the stocks tumbling. Regulatory concerns have investors playing hooky Perhaps of greater concern to investors are the legal and regulatory issues. The Securities and Exchange Commission has investigated Career Education, Corinthian Colleges and technical school operator ITT Educational Services (Research) for allegedly inflating their enrollment figures to receive more federal funding for loan programs for students. In addition, there have been several lawsuits from shareholders and former students, leading to worries of large fines, or worse, lost funding from the Department of Education. Kent Mergler, president of Northstar Capital Management, an institutional investment firm based in Palm Beach Gardens, Florida, said he recently sold his position in Apollo, which was not part of last year's probe, because of the negative headlines. But others think that concerns about possible sanctions are starting to wane and that the downside risk in the stocks is now minimal. Corinthian, for example, said in January that the SEC had completed its investigation of the company and was not taking any action against it. "I highly doubt that somebody is going to come and put these companies out of business," said Jeffrey Silber, an analyst with Harris Nesbitt. As such, Silber said that shares of several of the education companies are now attractive because they are still pricing in a worst-case scenario. He likes Corinthian, which trades for just 16 times calendar 2005 earnings estimates, and Education Management, which has a P/E of 21. "Last year there was a lot of noise in the sector. But on a positive note, you've seen a correction in the group," Silber said. Close also thinks Corinthian is a good value play and adds that Career Education and ITT, which trade at 15.5 and 22 times calendar 2005 estimates respectively, are also good bargains. Urdan said one other company that looks attractive is Laureate (Research), which operates many for-profit universities abroad. Nearly 80 percent of the company's sales come from Latin America and Europe so he said any cutbacks in U.S. funding would have little impact on the stock. But analysts are a little more wary of Apollo, even though it is, pardon the pun, the class act of the group. Shares trade at 28 times earnings estimates, a steep premium to competitors. For more about the job market, click here. For more about saving for college, click here. Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties with the companies.   Quelle "Apple earns its stripes" : Cnn.com Main page for "Apple earns its stripes"