The Zacks Analyst Blog Highlights: Apollo Group, Washington Post, Career Education, DeVry and ITT Educational Services

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Dec 10, 2012, 09:30 ET

CHICAGO, Dec. 10, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Apollo Group Inc. (Nasdaq:APOL), The Washington Post Company (NYSE:WPO), Career Education Corp. (Nasdaq:CECO, DeVry Inc. (NYSE:DV) and ITT Educational Services, Inc. (NYSE:ESI).

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Here are highlights from Friday's Analyst Blog:

Will For-Profit Education Survive?

The for-profit education industry has been going through trying times recently. Industry watchers had tied its fortunes with those of Mitt Romney in the presidential elections. Now that President Obama has won re-election, industry baiters are sharpening their knives, anticipating a slew of regulatory measures that will tighten federal aid and make the industry more accountable.

These are but symptoms of the deep-seated problems which have been plaguing for-profit colleges for some time now. Among these are appreciably high levels of student debt and falling graduation and job placement rates.

Only a few years ago, the University of Phoenix, owned by Apollo Group Inc. (Nasdaq:APOL) and The Washington Post Company's (NYSE:WPO) Kaplan, were gaining a substantial number of students and raking in the profits. The situation has changed drastically with a decline in enrollments in recent years. According to data released by The National Center for Education Statistics, college enrollment declined by 0.2% in the fall 2011. However, for-profit colleges saw the number of students signing up for courses falling far more, by 2.8%.

The focus is now on rationalizing operations and cutting profits. In October this year, Apollo said it was slashing 800 jobs and closing 25 campuses over the year. This is an effort to cut costs by $300 million by fiscal year 2014 to combat lower profits and falling student enrollment. In November, Career Education Corp. (Nasdaq: CECO) followed the same trend, announcing 900 job cuts and closure of 23 campuses.

The primary reason behind this scenario is fierce competition from nonprofit and state schools and questions about whether for profit education is actually worth the amount it costs. Students are now closely evaluating the pros and cons of taking up such courses which has led to stiff competition for a fast shrinking market.

One of the indicators of rising competition in the industry is rising ad spends. According to search analytics firm SpyFu, the University of Phoenix has been spending close to $400,000 per day on advertising. Washington Post's Kaplan, DeVry Inc. (NYSE: DV) and ITT Educational Services, Inc. (NYSE: ESI) have also significantly raised their marketing expenditure.

This leads us to the primary criticism leveled against the industry that it has been wasting taxpayers' money. Nearly $32 billion of these funds flow into its coffers every year and the prominent for profit colleges were counting heavily on a Romney victory to keep the cash coming in.

As we can see from their ad spends, a large portion of this money is diverted towards advertising. Senator Tom Harkin's report found that in 2009 22.7% of revenue was spent towards marketing and recruitment, while only 17.2% was spent on actual instruction.

All is not lost, and both kinds of institutions may survive. The first are the older more conventional kind of for profit colleges owned by the likes of DeVry Inc., which will compete harder by simultaneously increasing ad spends and cutting costs to attract students in a fiercely competitive sector.

The second are those which will differentiate themselves on offerings and target audiences such as Grand Canyon Education, Inc. In keeping with this argument, both these companies currently hold a shot-term Zacks #2 rank (Buy).

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