The for-profit education industry in the United States is shrouded in controversy and concern. Investors are understandably shaken by poor financial performance, while new student enrollment figures continue to decline for America’s biggest publicly-traded education companies. After dramatic declines for Strayer Education Inc (NASDAQ:STRA) University, Bridgepoint Education Inc (NYSE:BPI) and Apollo Group Inc (NASDAQ:APOL), are these stocks as cheap as they appear on the surface? Or do each of these stocks deserve a failing grade?
The bad news just gets worse
There’s no denying that shares of the nation’s biggest for-profit education stocks have plummeted over the last couple years. Strayer Education Inc (NASDAQ:STRA), Bridgepoint Education Inc (NYSE:BPI) and Apollo Group Inc (NASDAQ:APOL) have collapsed more than 40% over the past 52 weeks ending April 24.
Things got even worse for the sector when DeVry Inc. (NYSE:DV) released poor third-quarter earnings results. The stock plunged 20% on the day and sent the entire group down sharply. DeVry reported that revenue fell more than 5% in both the third quarter as well as the first nine months of the year. Operating cash flow fell more than 20% during the first three quarters of the fiscal year.
Student enrollments didn’t paint a bright picture for DeVry Inc. (NYSE:DV), either. DeVry University new undergraduate student enrollment declined 21% during the quarter.
DeVry Inc. (NYSE:DV)’s student numbers signify a broader problem facing the for-profit educators. Declining student enrollments pose a severe fundamental problem, since students comprise the customer base for these companies.
When Strayer Education Inc (NASDAQ:STRA) reported its fiscal fourth-quarter results, the company revealed that total student enrollment during the winter term fell 5% year over year.
Bridgepoint Education Inc (NYSE:BPI) exhibited the same problem when it released its own third-quarter results. The company had new student enrollments of approximately 20,500, compared with new student enrollments of approximately 22,000 for the same period in 2011, a decrease of 6.8%.
Apollo Group Inc (NASDAQ:APOL) also revealed enrollment declines in its most recent quarterly report, released in March. New degree enrollment dropped 15%, and total existing enrollment fell by 14% versus the prior year’s quarter.
Not as cheap as they seem
At first glance, value investors might view these names as cheap, undervalued stocks. After all, their price-to-earnings ratios seem modest. DeVry trades for 12 times earnings, while Strayer Education Inc (NASDAQ:STRA) exchanges hands for 8 times trailing EPS. Bridgepoint Education Inc (NYSE:BPI) and Apollo Group Inc (NASDAQ:APOL) are even cheaper, holding P/E ratios below 6. These levels may seem attractive, especially considering the S&P 500 Index as a whole trades for a trailing P/E ratio in the mid-teens.
However, in situations like these it’s important to remember that a P/E ratio is a snapshot in time. The metric doesn’t provide context into the direction these stocks are taking. The fundamentals are deteriorating, meaning that the valuation multiples will soon expand. As earnings continue to crumble, the P/E ratios of each of these stocks will rise, making them less attractive than they currently seem.
None of these stocks pays a dividend to shareholders, which demonstrates the lack of confidence management teams within the industry have about their own businesses. Strayer Education Inc (NASDAQ:STRA) University had paid a generous dividend of $4.00 per share annualized as recently as November 2012. However, the company suspended its dividend as a result of its deteriorating financial position.
Shares of for-profit education stocks may rally from time to time, but don’t be fooled: there are severe structural problems facing the entire industry. Student enrollments are declining, and until that trend reverses there is little reason to invest in for-profit education. Huge risks abound in the industry, and investors would be wise to avoid the sector entirely.
The article Should Investors Send For-Profit Education Stocks to Detention? originally appeared on Fool.com is written by Robert Ciura.
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