For-Profit Colleges Improve Their Financial Grades

The outlook brightens at career colleges as economic pressures spur more workers to seek specialized training

by Francesca Levy

Fifth in a multipart series on the business of college

The Keller Graduate School of Management isn't one of the country's highest-ranked or best-known providers of MBAs, and most students heading for business school haven't even heard of it. Yet it is one of the largest part-time graduate programs in the country, with roughly 12,000 students enrolled. Keller is a college of DeVry University, a profit-making school owned, along with three other learning institutions, by DeVry (DV), headquartered in Oakbrook Terrace, Ill.

After several years of struggle following the dot-com crash, DeVry—one of the largest publicly held higher education companies in the U.S.—has made a strong comeback. On July 30, DeVry said it would acquire privately held U.S. Education Corp., which owns two allied health colleges, for $290 million. Devry's stock has rebounded from the low 30s a year ago to the mid-50s.

While for-profit schools as an industry suffer from a legacy of recruiting violations and continuing concerns about instruction quality, they account for 7% of post-secondary enrollment, according to a recent report by JPMorgan analyst Andrew Steinerman. They served 2.8 million students in the 2006-07 school year in degree and non-degree programs and are challenging community colleges for students who want to develop specific workforce skills. No longer content with novices in computer technology and seekers of entry-level business certificates, the for-profits are now racing to stake claims in such growth industries as health care.

Broad Savings and Flexibility

Wall Street has taken notice. During economic downturns, professional training becomes more attractive to students, making publicly traded education companies like DeVry, Strayer Education (STRA), Corinthian Colleges (COCO), the Apollo Group (APOL), ITT Educational Services (ESI) and Cappella Education (CPLA) more appealing to investors. Shares of for-profits slumped during the fall and winter over concerns about the availability of student loans, but in many cases have bounced back.

"Given the current economic weakness, we find the education services stocks to be a timely relative safe haven with favorable intermediate-term prospects," Steinerman wrote in his July 25 report. "In addition to avoiding many costs of a traditional university (tenured professors, decentralized curriculums, dorms, and large physical libraries), for-profit schools usually are also more nimble at identifying which programs will be profitable and in demand."

Steinerman noted that for-profit colleges are well-positioned to responded to shortages of skilled workers and can produce good operating margins. On the other hand, the impact of government regulation and the outlook for student lending remain wild cards. The high price of gasoline, which affects students' ability to get to class, is another threat to enrollments.