Post-Secondary Stocks Set Up for Stronger H2, Says Wells Fargo (ESI) (CECO) (APOL) (DV) (LOPE) (BPI)

May 30, 2014 11:58 AM EDT Send to a Friend
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In a research note Friday, analyst Trace A. Urdan of Wells Fargo discussed post-secondary stocks. The group lost momentum recently as enrollment trends flattened and as a result of Gainful Employment (GE) regulations and other litigation, but Urdan thinks they are set up for a strong second half.

Companies mentioned in the report include ITT Educational Services, Inc. (NYSE: ESI), Career Education Corp (NASDAQ: CECO), Apollo Group, Inc. (NASDAQ: APOL), DeVry Education Group (NYSE: DV), Grand Canyon Education, Inc. (NASDAQ: LOPE), Capella Education Company (NASDAQ: CPLA), and Bridgepoint Education (NYSE: BPI). Others mentioned include American Public Education, Inc. (NASDAQ: APEI), Lincoln Educational Services (NASDAQ: LINC), Strayer Education, Inc. (NASDAQ: STRA), Universal Technical Institute, Inc. (NYSE: UTI), National American University Holdings, Inc. (NASDAQ: NAUH), Education Management Corp (NASDAQ: EDMC) and Corinthian Colleges, Inc. (NASDAQ: COCO).

"". . . we continue to see evidence of strengthening business models with better persistence in many cases, more efficient marketing, and a strengthening economy that should begin to create more favorable conditions for operators,” said Urdan. “While the regulatory noise is pitched at the moment, we expect it to diminish once GE regulations are settled. Thus, we believe the stocks can have a stronger H2 2014. In particular, we think those vocational names that have given back some of their 2013 gains offer investors a newly attractive entry point."

“Our favorite ideas (by preference) include: ESI (pitched battle between longs and shorts--we like the option value on the long side); CECO (we believe it burns only half its cash before starting to generate more); APOL (even flat starts could make the stock compelling given FCF characteristics and the company is moving in the right direction); DV (turnaround seems in hand, strong regulatory profile); LOPE (quality, differentiated provider is beating not-for-profits on their own turf); CPLA (holding its own in a competitive market, competency-based programs could make the difference); and BPI (remade university poised to retake share, high stakes H2 as Street doubts management’s enrollment promise.),” he continued.

“Our least favorite ideas (by preference) include: APEI (strong product and positioning but university struggles with military changes and civilian market too focused on stipends); LINC (starts have turned, but small cap and poor liquidity demand 1-2 more “show me” quarters); STRA (price reduction has aided demand but impact on revenue per student and margins may drag out over years); UTI (strong brand and long-term outlook, but tough near-term dynamic and murky execution); NAUH (decent performance in context, but micro-cap requires more); EDMC (core brand outlook murky, GE big overhang, debt obligations limit flexibility); COCO (weak demand, loan recourse, and lawsuits place real pressure on balance sheet; strategic options could create a ‘Hail Mary’.)”

For an analyst ratings summary and ratings history on ITT Educational Services click here. For more ratings news on ITT Educational Services click here.

Shares of ITT Educational Services closed at $17.30 yesterday.



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