Barclays on U.S. Education Services: Thoughts Ahead of Education Earnings
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Rating Summary:
6 Buy, 11 Hold, 1 Sell
Rating Trend:
Up
Today's Overall Ratings:
Up: 8 | Down: 5 | New: 26
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Barclays on U.S. Education Services: Thoughts Ahead of Education Earnings
Barclays analyst, Gary E. Bisbee, said, "The proprietary higher education industry is in an interesting spot, with fundamentals (revenue, profits) likely to deteriorate significantly over the next few quarters. However, with regulatory clarity having improved and the industry very well capitalized, we are becoming more optimistic on the 12-24 month outlook for many of the stocks."
"Overall, we believe the industry is in the early stages of an 18-24 month transition period in which changes being made to comply with the new regulatory environment and improve quality will hurt fundamentals and exacerbate near-term enrollment challenges (driven by external factors, including the weak economy, challenging marketing environment, increased competition, etc.)."
"With this in mind, we note 3 expectations for 3Q results: 1) New student starts are likely to remain weak, with y/y declines in line with or slightly worse than 2Q'11 for many companies; 2) As lower starts flow through to total enrollment on a slight lag, we expect y/y revenue declines and margin contraction to accelerate in 2H'11 and 1H'12; and 3) We believe Street estimates for 2012 are too high for several companies, including Strayer (Nasdaq: STRA), Lincoln (Nasdaq: LINC), andDeVry (NYSE: DV) (though aggressive buybacks could help offset this)."
"Despite these concerns, there are also several positives, starting with the industry's strong capitalization. Four covered stocks have 12%+ of market cap in net cash (Apollo (Nasdaq: APOL), Career Education (Nasdaq: CECO), DV, and Universal Technical Institute (NYSE: UTI)), and we expect all to generate healthy cash flows during the transition period to regulatory compliance. Share repurchases are currently highly accretive and could contribute 10% or more EPS upside for many of the stocks."
Barclays analyst, Gary E. Bisbee, said, "The proprietary higher education industry is in an interesting spot, with fundamentals (revenue, profits) likely to deteriorate significantly over the next few quarters. However, with regulatory clarity having improved and the industry very well capitalized, we are becoming more optimistic on the 12-24 month outlook for many of the stocks."
"Overall, we believe the industry is in the early stages of an 18-24 month transition period in which changes being made to comply with the new regulatory environment and improve quality will hurt fundamentals and exacerbate near-term enrollment challenges (driven by external factors, including the weak economy, challenging marketing environment, increased competition, etc.)."
"With this in mind, we note 3 expectations for 3Q results: 1) New student starts are likely to remain weak, with y/y declines in line with or slightly worse than 2Q'11 for many companies; 2) As lower starts flow through to total enrollment on a slight lag, we expect y/y revenue declines and margin contraction to accelerate in 2H'11 and 1H'12; and 3) We believe Street estimates for 2012 are too high for several companies, including Strayer (Nasdaq: STRA), Lincoln (Nasdaq: LINC), andDeVry (NYSE: DV) (though aggressive buybacks could help offset this)."
"Despite these concerns, there are also several positives, starting with the industry's strong capitalization. Four covered stocks have 12%+ of market cap in net cash (Apollo (Nasdaq: APOL), Career Education (Nasdaq: CECO), DV, and Universal Technical Institute (NYSE: UTI)), and we expect all to generate healthy cash flows during the transition period to regulatory compliance. Share repurchases are currently highly accretive and could contribute 10% or more EPS upside for many of the stocks."
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