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Get Four
|  | DECEMBER 17, 2003
By Eric Wahlgren Boning Up on Education Stocks [Page 2 of 2] LUCRATIVE GROWTH. Even if the allegations at both schools turned out to be true, Merrill Lynch analyst Lauren Rich Fine believes that the risk to CEC would be relatively limited. If both schools were to lose their accreditation and be forced to shut down, CEC's earnings per share might shrink by only about 5%, Fine says. "We believe this is a very unlikely scenario," says Fine, who rates the company a buy and has assigned it a 12-month price target of $64, which would represent 70% appreciation. (Merrill Lynch owns CEC stock.) Investors should note that CEC is the target of at least two shareholder suits, which is often the case when allegations like these emerge. But whatever comes to pass at CEC, analysts say they continue to believe the for-profit education sector will be a boon for investors. The companies' share of the $260 billion post-secondary market is only about 2.6%, so with each point of market share added, sales gains could be huge, ThinkEquity's Urdan says. Over the next few years, Urdan expects the concerns to average annual earnings growth of 25% on 10% to 15% revenue gains. "As campuses mature, they can continue these rates" because of economies of scale, he says. What's more, the schools have definite pricing power. With even state universities these days raising tuition annually at double-digit rates, the for-profit colleges have no trouble increasing theirs 4% to 6% a year, Urdan says. MYSTERY DROP. CEC's fundamentals are solid. Profits are expected to jump about 62%, to $1.15 a share, on a 50% rise in revenues, to $1.17 billion, in the fiscal 2003 year, according to Close. It's seen finishing out the year with some 79,500 students, up nearly 58% from 2002. Another for-profit university that analysts like is Santa Ana (Calif.)-based Corinthian Colleges (COCO ), which grants degrees in business, health care, criminal justice, and other areas. The stock plummeted in the same week as CEC's plunge after what Nasdaq described was a trading system misuse or malfunction. Corinthian Colleges released no news that would have warranted the decline. Standard & Poor's analyst Michael Jaffe sees its revenues growing 45% in fiscal 2004, generating a 36% earnings-per-share increase. He rates the shares buy and has a 12-month price target of $76, which represents a 47% appreciation over its current $51.82 price. (Jaffe does not invest in Corinthian, but other S&P departments may have ties to it.) STRONG RETENTION. Urdan recommends Baltimore-based Sylvan Learning Systems (SLVN ), the for-profit leader abroad that has about 95,000 students in nine universities in Latin America and Europe. He rates Sylvan an overweight and has assigned it a $40 price target, suggesting it could climb 46% from $27.46 in 12 months. "Their retention rates are very high because they operate in developing countries where people really want an education," Urdan says. Even Phoenix (Ariz.)-based University of Phoenix Online and its parent Apollo Group (APOL ), the biggest in the field with some 200,000 students, may warrant consideration, says Natalie Walrond, a research analyst at Pacific Growth Securities, a San Francisco investment bank. She has an equal-weight rating on Apollo and University of Phoenix because of their valuations. (Apollo trades at nearly 49 times calendar 2003 earnings.) However, Walrond says both outfits will continue to grow at rapid rates. "They're still only in 35 states, and they're underpenetrated in states in which they operate," she says. (Walrond doesn't own any shares, and her firm doesn't do business with the companies.) BRIGHT OUTLOOK. At least one financial whiz wonders whether a sector that grew so phenomenally during the jobs downturn will do as well if the economy continues to expand. "Perhaps people will conclude they don't need to spend the money on education to get a nice high-paying job," says Peter Cohan, a management consultant and executive in residence at Babson College in Babson Park, Mass. But Cohan also notes that for the moment, jobs growth is hardly robust. Walrond adds that many of the students who enroll in these for-profit schools already have jobs. Many are looking to finally finish their college degrees or take courses that will land them promotions. "Enrollment growth continues to be very strong," she says. Indeed, the sector's outlook is still bright. But with valuations still relatively high and the risk that one of the biggest names may be facing legal troubles, investors will want to do their homework on these stocks before buying.
 Wahlgren covers financial markets for Business Week Online in New York Edited by Beth Belton
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