What Influences The Performance Of For-Profit Schools?

What Influences The Performance Of For-Profit Schools?

Following President Trump’s election, policy wonks predicted loosening regulations in a variety of industries. Although not a sector the President focused on during his campaign, for-profit college is one industry that expected to benefit from regulatory rollbacks. Unsurprisingly, stocks of for-profit college companies have seen large gains since the election; however, questions about the reality of reducing restrictions in this industry are beginning to emerge. In court papers filed on March 29, the Justice Department defended the “gainful employment” rule that was implemented by the Obama administration. Under this rule, most for-profit education programs are required to prepare students for gainful employment in a recognized occupation in order to qualify for federal student aid. As it is clear that the direction of policy in the for-profit college industry remains in a state of flux, are there other factors that contribute to the success or failure of these companies and their stocks?

Industry Performance

Over the last six months, prices of for-profit college stocks have outperformed the S&P 500. An index of seven of the largest of these stocks by market cap has held steady in its outperformance over the last few months, showing a significant jump post-election when compared to the S&P 500.

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Average Weekly Earnings and Unemployment Rate

Aside from direct implications of government policy, average weekly earnings and unemployment rate (both by education level) may influence the performance of for-profit colleges.

Since 2002, stock prices of this bucket of for-profit colleges and weekly earnings across all education levels have become increasingly positively correlated. As earnings for individuals across all education levels increases, the stock prices of these schools also increases. Over the last year, this correlation is significantly stronger than it is when looking at the last 15 years.

On the other hand, the correlation between weekly earnings and the sales growth rate of this bucket of schools has become increasingly negative for most of the education cohorts. In particular, as weekly earnings for high school graduates declines sales growth for these colleges increases, and vice versa.

For-Profit Schools

For-Profit Schools

When looking at unemployment rates versus college stock prices, however, over the last year the unemployment rate for adults with less than a high school diploma is the only cohort that is positively correlated with college stock prices. This indicates that as the unemployment rate of this cohort increases, college stock prices will increase.

The correlation results for the unemployment rate of high school graduates and individuals with some college experience are counterintuitive to what one would expect. We would expect unemployment rates for these groups to have a positive relationship with college stock prices, as they have over the last 15 years. When unemployment rates for individuals with any education level less than a college degree increases, it would make sense that more people would turn to these for-profit colleges as a way of bolstering their skill sets and making them more desirable to employers. In the last year, stock prices have increased while unemployment rates have decreased slightly. As this differs from the longer term correlation trend, price movement of these stocks over the last year may have been more responsive to anticipated policy changes, rather than economic conditions.

For-Profit Schools

For-Profit Schools

What’s Next?

Given policy uncertainty, can other variables predict which direction the for-profit education market will take?

Over the last 10 years, wages have trended upwards, albeit at a seemingly slow pace. That being said, wages for high school graduates have leveled off in recent months, while wages for higher education levels have continued to increase. It remains to be seen if the negative correlation between wages of high school graduates and sales growth of for-profit colleges will hold true.

For-Profit Schools

Additionally, although unemployment rates of those with only a high school diploma have significantly decreased in recent years, these numbers still hover slightly above pre-recession levels. Similarly, as to be expected, the current unemployment rate of 5.3% for this is above the unemployment rates of individuals with some college experience (3.8%) and those with a bachelor’s degree (2.5%).

Article by Jessica Ulbricht, FactSet

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