The Education Industry continues to face a challenging environment. Since our July 27th sector update, most education companies have reported their June-quarter results. As expected, business prospects remain cloudy, as enrollment trends continue to be weak. This is largely the result of a fragile economy and still-soft job market. As a result of these conditions, students remain wary of taking out loans in order to get a degree that may not even yield a job in the near future.
June-quarter revenues and earnings at most schools continued to fall on a year-over-year basis, thanks largely to the ongoing declines in total student populations. Apollo Group (APOL) posted a 13% drop in degreed enrollment at its University of Phoenix subsidiary, which is the largest for-profit private university in the United States. Results there are typically a bellwether for the industry as a whole. Many other educators posted even larger declines in enrollments for the quarter, including Career Education (CECO) and ITT Educational Services (ESI).
Student starts rates were no more encouraging than the enrollment figures. Most companies reported falling student starts, including Career Education, which posted a 40% decline. These educators continue to face significant headwinds, including persistent public criticism of the industry, along with a more stringent regulatory environment.
Speaking of the regulatory landscape, some firms are still struggling to put these issues behind them. New Oriental Education (EDU) was issued a formal order of investigation by the SEC in July relating to its consolidation of Beijing New Oriental Education & Technology Group, a variable interest entity of the company, into its financial statements. These non-traditional accounting practices spooked investors, and caused a 30% drop in the stock price on the day of the announcement.
Apollo has also been facing some legal issues. Earlier in the year, the U.S. Department of Education (DOE) announced that it was reviewing two years of paperwork filed by the company to ensure that it complied with federal student aid rules. In late July, the DOE issued a clean bill of health to the school, although it also stated that despite the positive steps the company has taken, more needs to be done.
As a result of the heightened regulatory environment, many schools have had to make drastic changes that have hurt enrollments, revenues, and earnings. Some actions include the teaching out of certain programs (which is what Career Education decided to do at four of its campuses) and the closing of poorly performing campuses. Corinthian Colleges (COCO) was one of the educators that closed several underperforming schools. These actions have clearly hurt enrollments at these education centers.
Not all the performance metrics have been poor, however. Some educators have even reported some signs of improvement, including better conversion rates and improving inquiries. For example, despite ongoing legal issues, New Oriental continues to benefit from solid demand for its courses in China, although slowing economic growth in the country could temper future gains.
Corinthian Colleges posted a slight 1% increase in its total student population in June, and expects student starts to remain flat in the September quarter. However small, these are steps in the right direction. We are unsure if the handful of positive indicators can be considered a genuine inflection point in business prospects, or if they are simply one-time blips unrelated to a sustained rebound. At this point, we are leaning toward the latter classification.
All told, the Education Industry is still facing an uphill battle at this time. Lower enrollments, negative student start rates due to the soft economy, and ongoing regulatory issues will no doubt continue to put pressure on sales and earnings for most educators in the coming quarters. We therefore don’t expect a sustained turnaround in business prospects until mid-2013. This is when we anticipate a return to positive growth and enrollment increases, as managements at most companies will have had the chance to make necessary changes that hopefully will enable them to operate more efficiently and also meet new regulatory standards.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.