Education Stocks Once Again Get Slammed on Apollo Report

[Josh4580]

http://www.bloomberg.com/news/2010-10-14/apollo-withdraws-2011-forecast-citing-40-phoenix-student-enrollment-drop.html?cmpid=yhoo

 

Anyone been finding value in this space?  Seems like an industry to avoid at all costs given the major risks. 

[Myth465]

I would avoid at all costs. Steve Eisman is right on this one. Whether they add value or not (they dont), they depend on the State for funding and the State is broke. Someone will make money on them at some point, but thats the case with every stock.

[stahleyp]

Whenever there is fear, there is almost always an opportunity.

 

APOL is the leader in the industry. It also has very large executive support. The Sperlings own about $300 million worth (before today's drop, anyway) and the executives look to own about 5%.

 

Year ended last year, they had operating income of 1,039. Market cap is now only $5.5 billion. Now, if we assume that their operating income is half. That's severe, but not unrealistic, they're still only trading around 10x earnings.

[Phoenix01]

I have just loaded up on ESI.

 

The critiques against the industry are justified and relate to the shady operators that have been finding sub-prime students, loading them with government loans in order to fill up their schools.  I have not researched Apollo in detail, but they seem to be one of these.

 

ESI is runs more conservatively and has a much lower portion of students using government loan (70% versus 90%+).  They have been bunched up with all of the others, but I think that is a mistake.  25% of the executive bonuses are based on the student success (i.e. finding gainful employment after graduation).

 

As far as being good operators, ESI has the highest margins in the industry and is generating a ton of cash.  They are using most of this cash to buy back shares.

 

The shorts have been all over ESI, and accounted for 7.7M shares.  There are only 33.5M shares outstanding and the institutional investors own 36.2M shares.  The insiders also own 3.8M shares, so there are at least 16.3M shares missing without considering the buybacks and the non-institutional players.  This feels like Fairfax all over again.

 

[stahleyp]

ESI is a good idea to look at too.

 

I don't know a ton about APOL. I've researched it a little bit, but I'm gonna research ESI too. I think there is an opportunity to the sector. A lot to lose though!

 

A nice thing about ESI is that Columbia Acorn owns a small portion of it.

[Phoenix01]

Since there are so many shorts, they must be borrowing shares.  Does anyone know the borrowing costs for ESI shares?  Where can this information be found?

[Phoenix01]

I just checked the NYSE threshold list.  There are no companies on the list!!

http://www.nyse.com/regulation/nyse/Threshold_Securities.shtml?data-ipsquote-timestamp=20101013

 

 

 

[Myth465]

Phoenix01 you may have found a diamond in the rough. I like the bonus structure, and would look if I had more time and was less pig headed.

[ExpectedValue]

On VIC, even if you just have a guest account you can read the write up for EDMC which serves as a comprehensive look at the industry as a whole and the headwinds that they face. ESI is one of the companies that is described in the write up as facing substantial headwinds.

[Phoenix01]

Thank you TariqAli,

 

The article has an interesting approach to analyzing the situation.  It is mechanical and misses some of the finer points that set ESI apart from its competitors.  The base assumption is that the enrolment will shrink because a portion of the students will no longer be able to get access to the loans if the costs are too high.  However, ESI enrolment has continued to increase enrolment in Q1 & Q2 and the management has addressed this issue in the past by providing alternative financing and also bursaries and other fiscal incentive for student with good grades.

 

The alternative financing is through a joint venture with other investors to create a trust that provides the loans.  ESI is on the hook for the defaults above a specified level.  This is shown in the balance sheet as restricted cash and is a negligible sum.  A quick look at Apollo shows that they have significant restricted cash that keeps increasing.  I am assuming that a similar financial set-up was put in place for Apollo but with different results.  The bursaries and incentives costs are rolled into the SG&A and shown in the Income Statement as student services and administrative expenses.

 

ESI management seems very aware of their responsibility towards providing the students with gainful employment and have stayed well below the mandated levels.  I do not foresee any significant impact of the new rules on their long term performance.  If anything, the cleaning of the industry bad apples may provide further opportunities.  If I have missed something, please let me know ASAP!!!!

 

 

 

 

[Phoenix01]

The impact of the regulation seems to be over blown.  Secretary Arne Duncan from the U.S Department of Education gave the following telephone interview.

http://www.ibj.com/proposal-links-subsidies-for-itt-educational-peers-with-performance/PARAMS/article/21290

 

While most education companies provide valuable training and skills, high-cost education programs that lead to low-wage jobs are harming students, leaving them with hard-to-pay debts, Duncan said.

 

“We want to hit the ones at the bottom, those that simply aren’t working for students,” Duncan said in the press briefing. “The 5 percent would frankly be the bottom of the barrel.”

 

ESI is not that 5%.

 

[Phoenix01]

From the ESI annual reports

 

If an institution’s FFEL/FDL official cohort default rate is 25% or greater in any of the three most recent federal fiscal years, the ED may place that institution on provisional certification status. The ED may more closely review an institution that is provisionally certified, if it applies for approval to open a new location or offer a new program of study that requires approval, or makes some other significant change affecting its eligibility. Provisional certification does not otherwise limit an institution’s participation in Title IV Programs.

 

Below is a list of the ESI cohort default rate.

 

Federal Fiscal Year

FFEL/FDL Cohort

Default Rate Range

2008 (a) 3.6% to 15.5%

2007 (b) 2.7% to 15.2%

2006 1.7% to 12.9%

2005 1.3% to 12.6%

2004 5.8% to 12.7%

2003 4.5% to 10.2%

2002 2.1% to 12.1%

2001 4.9% to 12.7%

2000 4.5% to 17.5%

(a) The most recent year for which the ED has issued FFEL/FDL preliminary cohort default rates.

(b) The most recent year for which the ED has published FFEL/FDL official cohort default rates.

 

6. Financial Aid Programs

We participate in various Title IV Programs of the HEA. In 2009, approximately 70% of our revenue determined on a cash accounting basis under the calculation of the provision of the HEA commonly referred to as the “90/10 Rule” was from funds distributed under these programs.

We administer the Title IV Programs in separate accounts as required by government regulation. We are required to administer the funds in accordance with the requirements of the HEA and the ED’s regulations and must use due diligence in approving and disbursing funds and servicing loans. In the event we do not comply with federal requirements, or if student loan default rates rise to a level considered excessive by the federal government, we could lose our eligibility to participate in Title IV Programs or could be required to repay funds determined to have been improperly disbursed. Our management believes that we are in substantial compliance with the federal requirements.

 

[Phoenix01]

Blum Capital Partners currently hold over 10% of the outstanding shares and is adding more on the weakness.  Is anyone familiar with Blum?  Do they have a good track record?

[stahleyp]

Blum Capital Partners currently hold over 10% of the outstanding shares and is adding more on the weakness.  Is anyone familiar with Blum?  Do they have a good track record?

 

you probably already found their site, http://www.blumcapital.com/index.html

 

If you're a qualified investors and contact them, they might provide performance numbers.