On the face of it, the for-profit higher education business in the US would seem to be an attractive investment sector. Earnings growth rates for big companies are in the 20-30% range, balance sheets are sound, and P/E ratios modest.
Yet the for-profit public companies are among the short-sellers’ favorite playthings. For a crowd of professional cynics, they get very passionate, even moralistic, in their hostility to the sector. Companies such as Corinthian Colleges, Appolo Group and DeVry Inc, are repeatedly slammed by the shorts’ sale of borrowed reprinted research. And, yes, there are serious political risks to the companies’ revenue and earnings growth. One of these risks, called “gainful employment” will become more evident in this coming week.
There has been headline after headline about for-profit schools’ high pressure sales techniques and high loss rates on federally guaranteed student loans. However, much of the reaction to those issues is already in the stock prices, and given how reported loan default rates can be managed by the schools, that near-term risk for most of the sector’s earnings, if not its reputation, may now be overestimated. Few schools are likely to be made ineligible for loan support due to excessive losses.
The for-profit industry has, essentially, accepted that the commission-driven hard sell to naïve students is not acceptable. Still, the Obama administration will force the industry to make further profound changes, mostly using regulatory authority under existing law. It also has its hand on the tap of the loan program, which provides the biggest part of the industry’s revenue.