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For-Profit Education Sector Taking Huge Hit

Posted on Wednesday, Jun 15th 2011

The for-profit educational sector continued to face tighter scrutiny amid high student loan default rates, high interest rates, big debts, and accusations of “deceptive marketing practices.” Recently, the Department of Education (DoE) announced its final interpretation of the rule of gainful employment, which were less severe than anticipated. The new rules are aimed at protecting both students and taxpayers by regulating the federal aid provided to for-profit colleges. The DoE estimates that students at for-profit institutions account for 12% of all higher education students yet contribute to 26% of all student loans and 46% of all student loan dollars in default. According to the new rules, for schools to qualify for federal student aid, they have to ensure a minimum of 35% of their students repay loans and that loan payments constitute up to 30% of the former student’s discretionary income or 12% of their annual income. The DoE expects 18% of for-profit schools’ programs to fail this litmus test at some point, and 5% of programs to lose eligibility under the new law. The stricter rules have already translated to stringent enrolment norms being incorporated by for-profit schools. As enrollment figures tighten, some schools’ financial performance has also wavered.

Apollo Group’s Financials
For the recently reported quarter, Apollo Group (NASDAQ:APOL) saw the number of new student enrolments at the University of Phoenix fall 45% over the year. Q2 revenues of $1.05 billion fell 2% over the year but managed to exceed analyst expectations of $1.01 billion. EPS also fell from $0.84 to $0.83 but exceeded the Street’s expected $0.67.

The company expects weak enrollment figures to continue for the rest of the year and to extend to 2012 as well. For the year, it projects revenues of $4.65 billion to $4.75 billion with operating income of $1.15 billion to $1.20 billion. Revenues for 2012 are expected to fall further to $4 billion to $4.25 billion with operating income sliding to $0.68 billion to $0.80 billion. The market was looking for revenues of $4.51 billion with income of $1.03 billion.

Apollo’s Foray into Mobile
Apollo recently launched PhoenixMobile App for the iPhone and iPod Touch for the University of Phoenix. Through the app, students will be able to access campus maps, download lectures, and participate in online classrooms. The app claims to enable students to move seamlessly between the online classroom and their mobile phone and convert their “on-the-go” time to productive time by letting them participate in classroom discussions, work at assignments, and alert them about their grades as and when they are posted.

DeVry’s Financials
Meanwhile, DeVry (NYES:DV) saw Q3 revenues grow 11.6% to $562.7 million and EPS grew 14.4% over the year to $1.32. The market was expecting revenues of $563.8 million with earnings of $1.23 per share.

For the spring session, total enrollment across the company’s degree-granting schools grew 7.6% over the year to nearly 130,000 students. DeVry attributes this growth to the diversification of courses offered by them. However, new student enrollment fell 15.4% at DeVry University and 8.2% at Ross University.

DeVry’s Growth Investments
As part of DeVry’s growth plan, the company invested in building a joint simulation center proposed to be used by both Ross and Chamberlain students at their new Miami location. They are also building on the career services success and have announced a partnership with CareerBuilder to enable Keller graduates additional resources to seek employment, advance their careers, and access a personal career coach.

DeVry’s stock is trading at $57.55 with a market capitalization of about $4 billion. It touched a 52-week high of $62.31 earlier this month.

Grand Canyon’s Financials
Grand Canyon (NASDAQ:LOPE) is another online education player struggling to maintain its formerly impressive new student enrollment growth. During the session, enrollment grew 9.2% over the year to 42,500; however, this rate was significantly lower than previous year’s 37%. Q1 revenues grew 13.9% to $101.7 million with EPS of $0.25. The market was looking for EPS of $0.23.

For the year, Grand Canyon expects revenues to grow 10% in the first half of the year followed by 13% to 15% growth in the second half. They are targeting operating margins of 18% for the year.

The stock is trading at $13.24 with a market capitalization of $0.6 billion. It touched a 52-week high of $25.13 in June of last year.

Analysts estimate that last year, nearly a third of the higher education students in the country took at least one online course. Further, 3 million students were taking programs exclusively online. That number is projected to grow to 5 million by 2015. The private for-profit players are looking up to these online statistics to help them drive growth.

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