|BUSINESSWEEK ONLINE : FEBRUARY 7, 2000 ISSUE|
It's Time for a Refresher Course in Education Stocks
The new theme is online learning. And companies that are following it could take off
If you bought stock in an education business a few years ago and then, like hordes of investors, abandoned it last year in favor of faster-growing industries, you might be surprised how quickly the sector has changed. The business of education is in a period of dramatic transition, and investors now have a laser-like focus on the role technology -- and especially the Internet -- can play in delivering educational services. This new investing theme has funded a whole crop of education startups that are just now coming public and is forcing established educational services companies to rethink their core strategies.
"Very few products are more conducive to Internet delivery than education," says Jerry Herman, an analyst with First Union Securities. True, many of the new companies appeal to a small niche. But with the education market totalling a massive $700 billion, even a company that stands to gain 1% has a $7 billion opportunity, he says. "That compels a lot of investors to take a look."
Just a few years ago, the hot notion in education was giving students (including the growing number of working adults) the knowledge to compete in a job market that requires more skills and advanced degrees. The largest-cap stocks in the sector, like Sylvan Learning Systems (SLVN), which runs tutoring centers; Apollo Group (APOL), which operates for-profit Phoenix University; and DeVry (DV), which offers accounting and management degrees, were high-flyers in 1996, 1997, and 1998. In those years, they were growing fast and beating analysts' earnings estimates. But in 1999, as the economic boom continued and enrollment growth slowed because good jobs were plentiful, investors lost interest in these stocks, all of which fell 50% or more from their highs in the course of last year.
ANALYSTS' PET. Now, Wall Street is starting to get reacquainted with a few of these companies, which have real market share and earnings, and are just tapping the opportunity to bring their education content online. Best of all, the stocks are considered very cheap.
Apollo is a new favorite of several analysts, who are generally less impressed these days with its 85,000 Phoenix University students than with its 10,000 students engaged in online distance learning. Banc of America Securities analyst Howard Block upgraded Apollo to a "strong buy" on Jan. 18 and set a $38 price target based in part on his belief that it'll soon create a separate tracking stock for its online business. "It clearly is not getting credit for its clicks-and-mortar strategy," says Keith Gay, an analyst at Thomas Weisel Partners, who believes the online portion alone is worth $1.2 billion, while Apollo's total market is now $1.6 billion. The stock closed Jan. 27 at 21 7/16.
Sylvan, one of education's biggest laggards last year because of its muddy strategy, announced on Jan. 26 that it's selling its testing business -- from which it derives about half of its revenues and income -- for $775 million. Analysts say it will get about $600 million in cash and expect it to use the dough to launch a new Internet-related strategy. Gay points out that the cash covers most of its current market cap of $720 million, and the rest of the company should generate $300 million in revenues next year. That makes it look pretty cheap at $14 3/16 a share. The company hasn't yet said what it will do with the money, but analysts say it would make sense to use it to take its learning centers and English-as-a-second-language courses online.
FIRST-GRADERS. Rather than betting on a turnaround at an established company, many investors will prefer to take a chance on one of the promising new e-education outfits. Many aren't even public yet. But a few have lately made it out of the IPO gates such as Ecollege.com (ECLG), which provides technology and services allowing colleges to offer courses online. Investors also have their eyes on companies such as Embark.com, Skillsoft, Lightspan Partnership, and Varsity Books, which are currently in registration.
SmartForce (SMTF) is perhaps the bellwether of the new Internet education sector, although its services are targeted to adult employees. Merrill Lynch upgraded it on Jan. 14, setting a price target of $45. It closed Jan. 27 at 37 1/2, gaining 2 3/4 points that day after announcing new online courses for training in Microsoft Windows 2000. Formerly known as CBT Systems, it announced a switch last fall from selling software to, what else, offering Internet courses.
Another e-education pure play, ZapMe! (IZAP), is building Internet labs with high-speed Net connections in schools for free in hopes of creating a network that millions of students and parents will tap -- allowing it to make money from advertising and e-commerce. The concept hasn't been proven, but Gay thinks it has potential and, at $8, down from an October, 1999, IPO price of $11, could really move if it catches on. Scientific Learning (SCIL), an educational software company that went public last July, is one Merrill Lynch's Kathleen Bailey likes.
In 2000, investors may find bargains buying stock in one of the established companies that's taking a dot.com twist. Or they can opt for one of the more speculative emerging companies that doesn't have the baggage of a current shareholder base that expects steady earnings growth and that seems to have a practically unlimited opportunity. One thing seems clear: Stocks in this sector that aren't going dot.com will get left behind. As Gay says: "Education companies that are not developing an e-education strategy do so at their own peril."
By Amey Stone in New York
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BACK TO TOP
COVER IMAGE: For-Profit Schools
TABLE: The Business of Education
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ONLINE ORIGINAL: Edison's Chris Whittle: ``Winners of This Race Are Children''
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ONLINE ORIGINAL: John Walton: ``Making a World-Class Education Available to Every Child''
ONLINE ORIGINAL: It's Time for a Refresher Course in Education Stocks
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