My Two Favorite Education Stocks

 
Reading, 'Riting and 'Rithmatic

My Two Favorite Education Companies

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Recently, I attended my 50th high school reunion in Bethel, Maine. I had not attended any reunions during the past 20 years, so it was a delight to see many of my friends. Going this year made me wish I had attended more often.

I was lucky to go to an excellent school that prepared me well for college and the future. Many of today's students aren't so lucky, though. They attend inferior schools (although teachers strive to do their best). Many students lack discipline and have very little support from their parents. That's not true all across America, of course, but it's true in too many schools and too many homes.

In the U.S., high school graduation rates are unacceptably low. Only 70% of students graduate from high school. Graduation rates for African-American, Hispanic and low-income students are even lower, at 50%. And only half of our graduates are well prepared to succeed in college, career and life. I didn't make up these stats; the Bill and Melinda Gates Foundation has a substantial amount of information about our education system on its Web site.

Why am I fuming about our education system? Because there are many, many ways that we can get involved and turn this situation around.

First, we can all use more education, no matter what our age or status in life. For those of us elders, we need to stimulate the old cranium with new ideas, whether from educational TV programs, seminars, books or courses at our local college.

For those in the working world, I don't need to remind you: more schooling means more money. When this economy begins to gather steam, those who have sharpened their skills during the last couple of years will be in the best position to grab the best job opportunities.

As parents, we all need to instill confidence in our sons and daughters (or grandchildren) and inspire them to study hard and to stay in school. The future success of our great nation will depend on better-educated Americans in the generations ahead.

Most important of all--I suggest that we all have a responsibility to help educate our fellow citizens. We all have special skills and unique knowledge that could benefit those around us. No, I'm not saying we should become teachers. But I think we can volunteer our time to help in the education process. Schools at all levels are always in need of volunteers to mentor or tutor students. Music teachers, sports coaches and physical education teachers and art instructors need assistants to help with their ambitious programs.

Finally, senior citizen centers and centers for the less fortunate need volunteers to help with all facets of their programs. In these difficult economic times, you can not only help others, but contributing your time is an excellent alternative to writing checks for donations.

Bill Gates was asked what he admired most about Warren Buffett, the most successful investor of our time and a student, employee and disciple of Benjamin Graham. Mr. Gates answer was simple: Warren Buffett is a unique educator who is always willing to share his investing knowledge with anyone. Mr. Buffett's ability to simplify his investment philosophy and deliver clear answers has educated millions of investors around the world.

You can be a great teacher--you can help the education process in your own way.

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The business of educating America has been expanding quickly during the past decade. Student enrollments at for-profit post-secondary schools have advanced rapidly during the past couple of years, as adults upgrade their education and skills to achieve higher paying jobs. Also, adults who have lost their jobs are enrolling in vocational training programs and college degree programs to improve their chances in the job market.

Online education programs are growing by leaps and bounds at for-profit post-secondary schools. State schools have been unable to expand their online programs because of the current squeeze on state and local budgets.

For-profit schools, however, are experiencing rapid growth in enrollments and have been able to expand their physical campuses as well as their online offerings. As a by-product of the recession, advertising rates are noticeably lower which enable schools to increase their advertising without additional cost.

Apollo Group (APOL) is the largest provider of higher education programs for adults primarily through the company's University of Phoenix campuses and online programs. APOL offers associate, bachelor's and master's degree programs and serves about 443,000 students in 40 states and several foreign countries. Baby Boomers, Apollo's most important student group, are getting older, so the company will focus on attracting younger students by providing more associate degree programs.

Higher unemployment and increased federal funding for education loans have spurred fast revenue and earnings growth during the past year. We expect unemployed adults to seek higher education to improve their careers. After the last recession ended, Apollo's earnings skyrocketed 40% per year during the following four years. We expect swift earnings per share growth during the next three to four years as well.

Sales increased 27% during the 12 months ended August 31 compared to a year ago. Earnings per share jumped 30% during the same period. We expect sales growth of 20% and EPS growth of 30% during the next 12 months. Apollo is acquiring companies in faster growing countries, which will provide new growth opportunities and enable the company to boost sales and earnings further.

In October 2009, the Securities and Exchange Commission launched an informal inquiry into Apollo's revenue recognition practices. The scope of the inquiry is unknown, but management is cooperating fully with the inquiry. We believe the outcome will not have a material effect on Apollo's past or future financial results.

APOL shares sell at a very reasonable 12.6 times next 12-month EPS. No dividend is paid. We forecast strong growth during the next several years.

Another company that I like in the education services sector is ITT Educational (ESI), which offers post-secondary education programs to 79,000 students in 37 states. The company began offering technical courses in 1969 and now offers associate, bachelor's and master's degree programs in the disciplines of information and electronic technology, computer-aided drafting and design, criminal justice, health sciences and business.

ITT designs its course offerings based upon feedback from employers to help students become better prepared for the job market. Students can choose to take courses in regular classroom settings, online, or a combination of both.

The company indirectly offers federal student financial aid programs under the Title IV programs. In addition to Title IV loans, other funding is provided by the company in the form of student loans. Higher loan delinquencies will put a slight damper on earnings growth, but tuition increases will more than offset any losses.

ITT recently acquired Daniel Webster College, which will provide additional growth opportunities. Revenues increased 27% and EPS soared 48% during the last 12 months. We expect revenues to increase another 16% and EPS to rise 23% during the next 12 months. No dividend is paid. ESI shares are way undervalued at 10.7 times next 12-month EPS. Buy ESI now.

I hope you have a happy and safe New Year!

Sincerely,

J. Royden Ward
For Cabot Wealth Advisory

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