Investors In Education Stocks Stricken With Fear After Major Accrediting Body Comes Under Attack (CECO, APOL, DV, BPI)

Shares of for-profit education companies were walloped yesterday following news that the Office of Inspector General for the US Dept of Education (OIG) sent a letter The Higher Learning Commission (HLC) questioning the accreditation decisions of the group. The matter centers around the commission's choice in granting Career Education's (Nasdaq: CECO) AIU full initial accreditation with no limitations despite major issues. The OIG stated "We recommend that the Office of Postsecondary Education (OPE) determine whether HLC is in compliance with 34 C.F.R. Part 602 and, if not, take appropriate action under 34 C.F.R. Part 602 to limit, suspend, or terminate HLC's recognition by the Secretary."

HLC is the accrediting body for many for-profit and non-profit education institutions ranging from Northwestern Univ., University of Michigan, Notre Dame, to for-profits Apollo Group (Nasdaq: APOL) Career Education, DeVry (NSYE: DV), Grand Canyon (Nasdaq: LOPE), Education Management (Nasdaq: EDMC), American Public Education (Nasdaq: APEI), Capella (Nasdaq: CPLA), Washington Post Co. (NYSE: WPO) and Bridgepoint (NYSE: BPI).

Commenting on the OIG letter, the HLC said "we are in compliance and the OIG argument that we’re not is as weak as it gets. The OIG has seriously mischaracterized our actions and findings."

Analyst at Wedbush think the OIG's agenda is primarily to attack the independence of accrediting bodies. They note however that "investors could be correct in assuming that this is an attack on market-funded institutions by the OIG, particularly given that the HLC accredits many of the publicly traded institutions." That said, the firm said it is unlikely that the DOE would actually consider the suspension or termination of accreditation for HLC given its clout. The firm siad the OIG's attack on the accreditors once again introduces uncertainty and limits valuation multiple expansion back to historic norms. They think Bridgepoint could be particularly under pressure in the near term, given the company's own outstanding audit by the OIG - but they are telling clients to buy the stock at these levels.

Analysts at Piper Jaffray said while the news may look like an ominous cloud on the horizon for the group, they suspect the Dept of Education will want to remedy this situation rather swiftly so as not to disrupt the flow of funds to students attending HLC-accredited schools.

Deutsche Bank's analysts note that the letter specifically questions HLC's standards for credit hour requirements in their initial accreditation of American InterContinental University. The firm notes that the definition of credit hour is being addressed in NegReg. They differ from Piper Jaffray's view that the situation could be remedied quickly, saying "any investigation is not likely to begin before January, given the holidays, and is not likely to be concluded quickly given the size and reach of the HLC, and due to the DoE's focus on NegReg."

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