As Wall Street Took a Dive, Higher-Education Stocks Rebounded

Chronicle index of for-profit colleges shows a return of 108% since end of 1999

By ANNE MARIE BORREGO and GOLDIE BLUMENSTYK

Just as college often is a refuge for layoff-wary workers when the economy sours, higher-education companies have become shelters for stock investors spooked by the

ALSO SEE: The Chronicle Index of For-Profit Higher Education

tanking technology market over the last 15 months.

The stock prices of companies in the higher-education sector were almost uniformly on the upswing during 2000 and the first quarter of 2001, a trend analysts attribute to investors' rediscovered appreciation for the companies' consistent revenues and predictable profit margins.

That's in contrast to 1999, when their prices took a dive as investors seemed to prefer hot Internet stocks, and regulatory and legal disputes raised doubts about the viability of the education companies.

Had investors purchased a share in each of the stocks in The Chronicle's new Index of For-Profit Higher Education on January 3, 2000 (excluding the University of Phoenix's tracking stock, which was introduced after that), they would have spent $134.25, adjusted for splits. Investors who still held those shares at the end of the first quarter of 2001 would have a portfolio worth $277.46, a paper profit of 106.6 percent. The Chronicle's index itself, which is weighted toward its biggest companies, had a return of 108 percent in a period when the Dow Jones industrial average fell 13 percent and the Nasdaq composite index lost about 55 percent of its value.

A 12th company, Concorde Career Colleges, is publicly traded over the counter; it was dropped by the Nasdaq in 1993, because it was trading below $1 a share. (As a result, Concorde is not included in The Chronicle's index.)

"Investors have been flocking to a safe haven during this tumultuous time in the technology market," says Gerald R. Odening, a managing director at J. P. Morgan Chase. Analysts say higher-education companies, with strong balance sheets and consistent cash flows, will continue to be reliable alternatives to stocks that are susceptible to economic downturns.

Rising stock prices aren't the only news in the sector. A wave of consolidations has reduced the number of publicly traded higher-education companies to 11 from 14 a year ago. Two of the companies were swallowed up in acquisitions -- EduTrek International by the Career Education Corporation at the end of 2000, and Quest Education by Kaplan, a subsidiary of the Washington Post Company, in August. Computer Learning Centers filed for bankruptcy in January, amid charges that its recruiter-compensation plan was illegal.

At the same time, several of the remaining companies have grown aggressively, adding campuses domestically, internationally, and virtually, through expanding distance-education operations.

The general slowing in the economy should raise college enrollments, as often happens during downturns. Jerry R. Herman, a managing director of Legg Mason Wood Walker, says such a trend could help companies that offer postsecondary education. Legg Mason, an investment bank, has been involved in financing deals for Strayer Education and Kaplan, and a company that Mr. Herman used to work for has done underwriting for Career Education.

During recessions in the last 25 years, he says, the growth in college enrollment was about 2.5 times the usual average growth. "When folks are feeling a bit concerned about the job market," he says, they often return to college to become more attractive to employers. And while many companies in a financial squeeze might cut back on their own spending for training, Mr. Herman suggests that college-level education won't be hit as hard.

The predictability of the higher-education businesses' earnings is a real treasure for investors in today's market, says Mr. Odening, who expects the companies' earnings growth to average 20 percent per year for the foreseeable future. Mr. Odening's current and former employers have acted as investment bankers for several higher-education companies.

Also appealing to investors is that some companies in the sector have stuck with proven strategies for growth for years. DeVry, for example, has used the same growth plan since its current management -- Dennis J. Keller, chairman and chief executive officer, and Ronald L. Taylor, chief operating officer -- bought the company, in 1987. Mr. Taylor says that the fall of DeVry's stock price in 1999 and its subsequent rise in 2000 do not seem related to the company's corporate strategy or performance, which have remained consistent. He suggests that the ups and downs have had more to do with market psychology than DeVry's financial performance.

The stock market's volatility could also help the biggest chains get bigger by making it easier to buy up small chains and individual colleges, says Mr. Odening. Within the last year, the market for initial public offerings has waned, making the smaller players reassess their growth plans, analysts say. Smaller companies like Argosy Education, which raised about $25-million for the company and its founder when its stock made its debut, in 1998, were able to go public in the I.P.O. boom of the late 1990's. But the atmosphere has changed, as investors watched formerly hot stocks fall below their offering prices.

"You can't really go public now unless you have a valuation that begins around $250-million," Mr. Odening says. "Many of these private schools don't have the scale to begin with to get to that larger valuation. So companies that typically had made acquisitions a part of their growth strategy -- such as Corinthian Colleges and Career Education -- are seeing very reasonable prices."

Career Education has already taken advantage of the trend. Last October, the company announced it would purchase the financially troubled EduTrek International, for about $81-million in cash, stock, and assumed debt. It completed the purchase in early January. The company also bought two culinary schools and two Canadian institutions last year. "We had a great 2000," says Patrick K. Pesch, Career Education's chief financial officer. The company increased net revenues by 50 percent, to $325.3-million, up from $216.8-million in 1999.

Mr. Pesch says Career Education plans to buy more. Most of its future acquisitions will probably be privately held companies, he says, but that's primarily because "there are a lot more of them."

Corinthian Colleges, which operates 53 campuses in 19 states, purchased six institutions -- some with multiple sites -- in 2000 and the first three months of 2001, and its stock is soaring. Shares of Corinthian closed at $40.25 at the end of this year's first quarter, up from $26.38 at the start of 2000, before its 2-for-1 split in December. Dennis N. Beal, Corinthian's executive vice president and chief financial officer, says the company has "a very full pipeline of potential acquisitions."

Argosy, which operates graduate institutions and offers preparatory courses, was also on the acquisition trail. Much smaller in size -- its revenue for the 2000 fiscal year totaled $44.1-million, compared with $325.3-million at Career Education and an estimated $170.7-million at Corinthian -- the company recently purchased Western State University, the John Marshall Law School in Atlanta, and the Connecting Link, a provider of continuing education for elementary and secondary teachers.

Sylvan Learning Systems, by contrast, sold off some of its assets, which some investors had found "disconnected" from the company's main business and from each other, according to Sean Creamer, the company's interim chief financial officer. The company sold its Aspect language school and its giant Prometric testing division to focus on its postsecondary-education business, which is growing. For 2001, Sylvan believes that about $300-million of its projected $475-million to $490-million in revenue will come from its postsecondary business. Just two years ago, higher education accounted for $118-million of the company's overall revenues of $274-million.

Sylvan officials have said they plan to add two new institutions to their overseas operations in each of the next several years. They also expect increased growth from a teacher-education subsidiary, Cantor Associates, and from Cantor's burgeoning relationship with Walden University, a private for-profit university that offers graduate degrees. Through its venture-capital division, Sylvan acquired a 41-percent stake in Walden this year.

While several e-learning and distanceeducation dot-coms have fallen out of favor with investors, companies that have added an online-learning component to their traditional campus businesses are booming. J. P. Morgan's Mr. Odening calls the Apollo Group's University of Phoenix Online the "gold standard" for online education and "the model to emulate," citing its students' comparatively high completion rate of 60 percent, its profitability, and its continued growth. The University of Phoenix Online reported that its enrollments had reached 20,400 students as of February 28, an increase of 67 percent over the year before. Apollo introduced a tracking stock for its online division in September 2000. As of March 31, those shares had increased to $29.19, up 109 percent from its initial-public-offering price of $14.

Laura Palmer Noone, the president of the University of Phoenix, says the company expects its online enrollments to increase by 50 percent over the next year. "A lot of people laid off from dot-coms are realizing that that's not the way to long-term financial gain," she says. "Building on a solid education is a better way to go, and our focus on quality makes us well-positioned to meet that need."

Other institutions, taking cues from Apollo, have started online programs that can stand on their own or be integrated with the companies' on-campus degrees. Corinthian announced that by the end of March, its distance-learning activity -- which it defines as one student enrolled in one course -- had increased 62 percent over last year.

While most publicly traded higher-education companies have enjoyed gains in revenue and profits and a general increase in stock value, one has not. Computer Learning Centers was forced to file for bankruptcy in January, after the U.S. Department of Education ordered it to repay $187-million in federal student loans for allegedly violating a law that prohibits colleges from paying recruiters based on the number of students they enroll. After running into subsequent financial problems, the company closed its doors (The Chronicle, February 16).

Federal inquiries did not stop with Computer Learning Centers. The Education Department also informed ITT Educational Services that the chain of technical colleges was being investigated for illegal recruiter-compensation practices -- an inquiry stemming from a pending whistle-blower lawsuit. Rene R. Champagne, the company's chief executive officer, says he can provide few details about the investigation. He believes that the complaint, which remains under a court-ordered seal, was filed by a disgruntled former or current employee. "I don't know much more about what's going on," Mr. Champagne says of the lawsuit's specifics, but he predicted that the federal investigation would vindicate ITT.

ITT's stock took a hit after the investigation was announced, but Mr. Odening doesn't think it will have any effect on the company's overall strength. The company also could get some help from four members of Congress, who have been looking into reforming or clarifying the law, which many colleges have said is confusing.

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