For-profit education stocks such as Capella Education Company (NASDAQ:CPLA), ITT Educational Services, Inc. (NYSE:ESI), and Grand Canyon Education Inc (NASDAQ:LOPE) have witnessed a sharp rally lately with all the three stocks rising in double digit percentages during the last week. For regular readers of ValueWalk, this should not come as a surprise as the advantages of this business model has been discussed regularly. What is happening differently now is that the market is shedding reluctance and caution over increasing government controls – a factor often cited as the reason behind investors’ reluctance in investing in the sector.
Job Growth Fuels Rally
Another factor contributing to the rally is better than expected growth in the job market. In April, a payroll jobs gain of 165,000 was better than expected as the consensus called for a gain of only 140,000. Even better news were the upward revisions to February and March estimates which bolstered payroll gains to a combined 114,000. All the jobs gains were in the service sectors, led by business services, leisure and hospitality, retail trade, and health. Strong April numbers, coupled with a revision for earlier months, not only provided a good starting point for the second quarter but also defied concerns the markets had regarding sequester cuts.
Capella Education Company (CPLA) Ahead Of Expectations
Since an improving job market almost always translates to better prospects for education companies, it was no surprise that shares of the Minnesota-based online education company Capella Education Company (NASDAQ:CPLA) spurted. The company surprised the market by posting first quarter results ahead of expectations. Although revenues fell 3.8 percent to $105.2 million on lower enrollments and profits also tumbled to $8.8 million during the quarter, the negatives were already factored in stock price. Following the results, analysts increased their target prices on the stock in anticipation of better enrollments in coming quarters. Shares of this debt free company are still quite attractive at a price earnings multiple of 14.8. CPLA has a share buyback program in place which further boosts the stock’s attractiveness.
It was only last month that ITT Educational Services, Inc. (NYSE:ESI) touched a new 52 week low but has recovered smartly since then. During the last month, the stock has advanced 65 percent. Like Capella Education Company (NASDAQ:CPLA), this was made possible by ITT’s bumper first quarter results. Quarterly revenues stood at $287.7 million, down 15.8 percent from the same period last year but ahead of consensus estimates of $276 million. Another positive for the stock was the company’s reiteration of maintaining its prior guidance for the full year. Despite the rally, the stock is still down 65 percent from a year ago indicating to the severe beating it took during the last year. Its stock is priced at 8.4 times forward earnings while a price by sales ratio of 0.4 is further proof of the stock’s undervaluation.
Similarly, Grand Canyon Education Inc (NASDAQ:LOPE) reported vastly improved earnings performance which sent the stock to a new 52 week high. Revenues jumped 21.3 percent to $142 million for the quarter while profits increased 44.8 percent to $20.9 million indicating better margins. The company also issued operating margin guidance of 23.5 percent for the full year, in line with the 23.7 percent margin it achieved during the latest quarter. Coupled with an expanded share repurchase program, the stock’s price of 15 times its forward earning looks attractive. This is not super low as with Capella Education Company (NASDAQ:CPLA) and ITT Educational Services, Inc. (NYSE:ESI) is in a different league and slightly higher valuations are justified for the growth it offers.
The late rally in these stocks has vindicated our view that despite government legislations, these companies serve a fundamental need of a society and thus, would not be short of business. Coming quarters are expected to see student enrollments going up which should again offer some tailwind to these companies.