Schools Industry Outlook Bright: Online Education Holds Key

The Zacks Schools industry comprises for-profit education companies that offer undergraduate, graduate and specialized programs in areas of finance, accounting, analytics, marketing, healthcare, business and technology. The industry players also offer child care services and career-oriented, post-secondary courses.

Some companies within the industry also provide yoga classes and yoga-related retail merchandise-integrated fitness classes along with conduct workshops and teacher training programs.

Let’s take a look at the industry’s three major themes:

  • Amid the novel coronavirus outbreak, for-profit education stocks have been reaping benefits from the rise in virtual delivery of education. As the world struggles to contain the pandemic, many for-profit education companies have undertaken initiatives to reach students who aspire to complete their courses as planned, with the help of various online education platforms. Also, classroom type education providing companies like Universal Technical Institute, Inc. (UTI), Lincoln Educational Services Corporation (LINC) and Perdoceo Education Corporation (PRDO) are cashing in on the unprecedented surge in demand for online education these days.
     
  • Apart from this, in order to boost profitability, school companies are resorting to aggressive cost cutting through significant layoffs, campus closings and consolidations. Developments like switching to online education programs, increasing use of technology in education, more investments in education, regular introduction of programs and specializations should boost student outcomes along with tie-ups with different organizations to reduce exposure to Title IV funding, improve academic quality and retain students. Many for-profit education companies are investing in non-degree programs and designing programs that are specifically aimed at meeting the educational needs of working adults in targeted professions.
     
  • On the flip side, growth in the industry may be impeded by legal and regulatory issues faced by post-secondary schools in the United States, increased competition, higher expenses for various programs, and shortage of skilled labor. Also, higher unemployment levels may prove detrimental to for-profit education companies.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Schools industry is an 18-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #81, which places it at the top 32% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates impressive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector & S&P 500

The Zacks Schools industry has outperformed the broader Zacks Consumer Discretionary sector as well as the Zacks S&P 500 composite over the past year.

The stocks in this industry have collectively gained 14.2% versus the broader sector’s decline of 10.1%. Meanwhile, the S&P 500 has risen 4.1%.

One-Year Price Performance

 
Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing for-profit education stocks, the industry is currently trading at 33.9X versus the S&P 500’s 22.2X and the sector’s 32.8X.

Over the past five years, the industry has traded as high as 38X, as low as 15.5X and at the median of 28.2X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

 

Bottom Line

Given the COVID-19 outbreak, for-profit education companies are expected to benefit as online educators are viewing shutdowns as an opportunity to increase reach among students. Moreover, for-profits education companies are forging corporate and community college partnerships to educate their workforce. Prudent cost management and continued focus on driving profitability along with strategic initiatives are expected to boost the industry.

Here we present three stocks from the for-profit education industry, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy), and are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Perdoceo Education Corporation: This Schaumburg, IL-based educational service provider currently carries a Zacks Rank #1. The company has an expected earnings growth rate of 10.2% for the current year. Over the past 30 days, the Zacks Consensus Estimate for its fiscal 2020 EPS has risen 4.1%.

Price and Consensus: PRDO

Universal Technical Institute, Inc.: This Scottsdale, AZ-based technical education service provider currently carries a Zacks Rank #2. The company has an expected earnings growth rate of 167.3% for the current year. Over the past 60 days, the Zacks Consensus Estimate for its fiscal 2020 EPS has risen 150%.

Price and Consensus: UTI

American Public Education, Inc. (APEI): Headquartered in Charles Town, WV, this company is an online provider of higher education, focused primarily on serving the military and public service communities. Over the past 60 days, the Zacks Consensus Estimate for this Zacks Rank #2 company’s 2020 EPS has moved up 14.9%.

Price and Consensus: APEI

Investors might also prefer holding on to the following Zacks Rank #3 (Hold) stocks with impressive prospects.

Grand Canyon Education, Inc. (LOPE): Based in Phoenix, AZ, this company is a regionally accredited provider of online postsecondary education services focused on offering graduate and undergraduate degree programs. It has a three-year expected EPS growth rate of 15%.

Price and Consensus: LOPE

Strategic Education Inc. (STRA): Headquartered in Herndon, VA, this post-secondary education provider has an expected earnings growth rate of 10.9% for 2020. It has a three-year expected EPS growth rate of 15%.

Price and Consensus: STRA

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Universal Technical Institute Inc (UTI) : Free Stock Analysis Report
 
Strategic Education Inc. (STRA) : Free Stock Analysis Report
 
Career Education Corporation (PRDO) : Free Stock Analysis Report
 
Grand Canyon Education, Inc. (LOPE) : Free Stock Analysis Report
 
Lincoln Educational Services Corporation (LINC) : Free Stock Analysis Report
 
American Public Education, Inc. (APEI) : Free Stock Analysis Report
 
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