Despite Price Gains, For-Profit Ed Remains Risky Investment

Nearly four months after warning investors that companies in the for-profit education sector might be overvalued, has gone back to evaluate the state of the industry. At the time, Alpha writer Vince Martin explained that the weak P/E ratios and a number of regulatory setbacks dealt to for-profit education providers courtesy of the US federal government made them a risky investment, even when taking their relatively cheap price tag into consideration.

Since that time, prices of stocks in the sector have inched up. But as two recent developments indicate, they remain a highly speculative and possibly ill-considered place to invest your money.

The first piece of bad news came courtesy of one of the largest players on the market, the Apollo Group. The latest financial statements released by the company last week show that it has failed to meet analysts' expectations — news that was greeted by a 9% drop to its stock price in subsequent trading. According to Martin, the steep drop could be attributed to the fact that analysts didn't sound particularly optimistic in their projections to begin with, which means by failing to clear even a lowered bar, the company was signaling that something was seriously wrong on the inside.

What caused the declines? Lower enrollment hurt top-line growth, as total enrollment was down nearly 14% in Q4 from the year-prior period. And yet, operating expenses were flat, excluding restructuring charges and impairment of goodwill and intangibles. Most notably, instructional and marketing costs increased from 51.3% of revenue in 2011 to 57.9% in 2012. Simply put, Apollo is paying the same amount to educate fewer students.

Apollo's bad showing has already snowballed into declines in the stock prices across the entire sector, as bad news for one significant player tends to have an effect on the rest. Even on the day of Apollo's earnings release, the sector's stocks tumbled 10% merely from the announcement that Bridgepoint Education is under investigation by the U.S. Department of Justice.

This is the latest in a long line of bad news dogging Bridgepoint. Previously, the Western Association of Schools and Colleges denied Ashford University's accreditation application earlier this summer.

 The industry is simply in the political crosshairs. There was an 800-page report issued by a Senate committee in July, criticizing the industry's aim to "serve shareholders over students," according to The Washington Post. That committee already goaded the Department of Education into passing stricter regulations on recruiting and student performance back in July, with failing colleges facing the potential loss of federally subsidized loans and grants.

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