Dec. 13, 2005

Growth of For-Profit Colleges Moderates

For-profit higher education has thrived in recent years, attracting students and investors in significant numbers. Since 2002, enrollments at the major publicly traded college companies have grown by an average of 22 percent per year, and the stocks of those companies have risen by an average of 203 percent since 2000, a period when the Standard & Poor’s 500 index of stocks has fallen by 4.2 percent.

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While commercial providers of higher education will continue to perform relatively well, the days of such “unsustainable” growth is over, analysts told an audience of college officials, investors and others at the 2005 Education Industry Finance & Investment Summit in Washington.

The analysts, Robert L. Craig and Jerry R. Herman of Stifel Nicolaus Education Research, noted that total enrollment growth for the publicly traded companies in the third quarter of 2005 was 11 percent, and that their composite stock price, after dropping by 4 percent in 2004 following a rise of 91 percent in 2003, were set to level off at a 7 percent increase so far in 2005.

“The years of go-go growth are largely behind us,” Craig said, predicting that in the next several years, enrollments would average in the 10 to 15 percent range and earnings per share would rise by 20 to 25 percent, compared to the 29 percent quarterly year to year growth since 2002.

He and Herman attributed the slowdown — which they characterized as a “normalization” — to a combination of factors, including intensified competition for students (which increases the colleges’ “acquisition costs"), continuing legal and regulatory problems for some of the higher education companies, notably the Career Education Corporation, and some overexpansion, among others.

“Some moderation in new campus start-ups has taken place recently,” Herman said, as he shared a table showing small increases between 2004 and 2005 in the number of campuses operated by the Apollo Group (244 compared to 219), DeVry, Inc. (78 vs. 71), Education Management Corporation (71 vs. 67), ITT Educational Services (81 vs. 77) and Strayer Education (37 vs. 30). Career Education Corporation, which has been barred by the U.S. Education Department from opening new campuses, has shrunk from 82 to 80 campuses, and Corinthian Colleges has dropped to 129 from 126 colleges a year ago.

Some of the companies “overstepped their bounds a little” and are taking time to assimilate what they have, the Stifel Nicolaus analysts said.

The major opportunities for the companies going forward appear to be in online programs and internationalization, according to Craig and Herman. Over all, fully online students represent one in every 15 students now enrolled in higher education, and online students are nearly 250,000, or about 35 percent, of the 700,000 students attending the publicly traded for-profit institutions.

— Doug Lederman

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