Hartcourt Companies (fka HRCT)

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For-Profit Schools Excel Again Via Smart Cost, Retention Moves
Thursday November 1, 6:58 pm ET
Kevin Harlin


After some difficult years, education companies have figured out how to get their grades up. They're watching costs and keeping their existing students in class.
Many for-profit schools also are benefiting from a sluggish U.S. economy.

Capella Education (NasdaqGM:CPLA - News) on Thursday said third-quarter profit rose 45% to 29 cents a share, 3 cents above analysts' views. The online graduate and undergraduate school boosted enrollment by nearly 24% vs. a year ago.

Capella's stock rose 7.5% to a new high. It's more than tripled since its November 2006 IPO.

Classmate Strayer Education (NasdaqGS:STRA - News) also beat views by 3 cents Thursday. Third-quarter profit rose 45%.

But investors gave the business and accounting school a slight rap across the knuckles after it guided fourth-quarter and 2008 forecasts lower. Shares sold off hard early, but closed down just 4% after hitting a new high on Wednesday.

Enrollment rose 15% year over year. Strayer said it's accelerating the pace of campus growth.

"Pretty much all of these companies have focused on retention and graduation rates. That pays off for investors," said Alexander Paris Jr., an analyst who covers the sector for Barrington Research.

IBD's schools group has risen about 63% so far this year after moving sideways for three years.

Analysts say the group has mostly figured out how to fill a niche in a cost-effective way.

Many have shed expansive real estate in favor of leasing smaller offices for classroom space. While they still are looking for new students, they have focused on improving graduation rates. It's cheaper to keep a student than recruit a new one.

The industry is still under regulatory scrutiny. Capella on Thursday said it met with Education Department officials in July as part of a probe of financial aid practices.

But Paris thinks they mostly have shaken the pall of suspicion that dogged the industry through 2004 and 2005.

In 2004, federal agents raided the headquarters and 10 campuses of ITT Educational Services (NYSE:ESI - News), looking for evidence of enrollment inflation to get more government funding. No charges ever came. Other for-profit educators faced similar reviews.

ITT's shares since have more than doubled, reaching a new high last month. ITT last week reported 27% profit growth, beating views. It also raised guidance for next year.

The head of the class remains New Oriental Education & Technology (NYSE:EDU - News). Revenue jumped 50% in the last quarter at the Chinese company that teaches English to professionals and students wanting to study abroad. It hit a new high Monday. Although it since has come down, it still is up 472% from its September 2006 offering price.

Education stocks generally rise as job creation lags, as professionals look for new skills to get ahead. U.S. hiring has been sluggish this year. Economists expect modest growth in Friday's Labor Department October jobs report.

But weak job figures are less important for some. The online educators, for instance, prefer healthy employment, because most of their students already are employed.

Overall demographics are a bigger driver. The children of the baby boomers -- the so-called echo boomers -- are looking to advance their careers.

But even as the market grows, the companies face increasing competition from traditional not-for-profit community colleges and four-year universities.

"The fact is that those schools are starting to take the online market more seriously and the adult market more seriously," said Richard Garrett, program director for online higher education at Eduventures, the research and consulting firm.

Garret thinks traditional colleges and universities will end up with 68% of the online student market in 2008, up from 65% in 2005.

But William Blair analyst Brandon Dobell thinks the for-profits are rising to that challenge.

The for-profits still have an edge in customer service.

"They run this as a business and the customer is the reason they're there," Dobell says. "They take care of the customer. That's a huge mind-set difference over a traditional institution."