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Author: anuragupta Big gold star, 5000 posts Top Favorite Fools Old School Fool Ticker Guide CAPS All Star Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 47  
Subject: My case on For-profit sector Date: 12/31/2010 7:17 PM
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I did some research on this sector:

References:
http://online.wsj.com/article/SB1000142405274870390870457543...
https://news.fidelity.com/news/news.jhtml?articleid=20101203...
http://www.edtrust.org/sites/edtrust.org/files/publications/...
http://abcnews.go.com/Business/TheBigMoney/profit-colleges-s...
http://blogs.barrons.com/stockstowatchtoday/2010/12/31/apol-...


a) Quality:

Six-year graduation rates at Apollo's University of Phoenix, the largest for-profit college in the U.S., are just 9%, the Education Trust report said. DeVry's (Symbol : DV) six-year graduation rate is 31%. ITT Technical Institute fared better with a 66% six-year grad rate. I could not get BPI's rates. One may argue that these low rates are more of a reflection of the composition of the student profile (poor, under priviliged etc.) than the quality but it is something worth studying. So interestingly as per one of the references:

The graduation rates at two-year and less than two-year for-profit colleges are better. At two-year for-profits, 60% of students earn an associate’s degree or certifi catewithin three years. At less than two-year for-profi ts, 66% earn a credential within three years. These completion rates are considerably higher than the 22%rate at public community colleges.


b) Loan Repayment rates: A key metric for federal aid. It seems that the hurdle rate is 45% (as proposed by the govt). This may or may not be reduced eventually once the regulation is enacted.

APEI, BPI: 45%
DV: 40%
APOL: 44%
ITT: 31%
STRA, WPO, Cornithian: < 30%

It is interesting that while ITT has a high graduation rate (higher than public univs) it has such a low loan repayment rate.


c) Corporate governance: this has little do with the regulation to improve the education quality. APOL does seem to have several knocks against it. APEI has been given high marks by TMF (HG).

Clearly, there is a reason why APEI is trading at the highest valuation among its peers. My guess is that market has greater faith in its management.

d) The reports point out that the for-profit education sector provides education at a much higher cost than public and private univs. The reason why this sector has seen dramatic growth is its flexible approach to education and a chance for a degree to those who would not qualify for education in regular univs either due to their academic background and/or professional obligations. Alhough for-profit sector is cornering 24% federal aid, it is educating only 8% of the students. The defualt rate is very high as compared to the non-profit sector. It is like a subprime situation as one of references points out and as such is not sustainable since the public cannot be saddled with growing unpaid debt. High profits have ensnared politicians to lobby for this sector and that is helping it stay afloat.

One of the reports debunk APOl claims that it is helping the needy: despite claiming to help poorer students get an education, the for-profit industry is sucking students away from cheaper programs at community colleges, only to leave them trapped in debt and unable to continue.

I think investment in this sector is risky and need to be capped in one's portfolio. I am likely to maintain my position in APEI (HG pick) which has not seen any major criticism unlike others. But I am thinking of transferring my small APOL investment into BPI and not raise it to any substantial amount. If this sector indeed has a great promise, I would prefer the market to do the heavylifting here.

Comments welcome.

Anurag
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