Q&A: Wall Street Bullish on Post-Secondary eLearning Stocks
Companies selling technology into the post-secondary market
will encounter good growth potential, according to analysts
at a recent financial analysts roundtable discussion. The
discussion, hosted by the Wall Street Transcript, included
Gary E. Bisbee III, an analyst at Lehman Brothers, Gerald
Odening, managing director of Jefferies and Co., and Jeffrey
Silber, managing director at Harris Nesbitt Gerard
Here is an excerpt from the discussion:
Q: What has gone on over the past year in the education
space that’s important?
Gerald Odening: Most of the questions coming up about this
group, which has performed superbly, have generally been
about whether we are at a top in terms of valuation. My
feeling is that the stock prices and multiples in the education
group for postsecondary will continue to rise. This is in contrast
to last year when a number of holders of the stocks were concerned
that many people would be selling these stocks in 2003 when
technology and more cyclical sectors began to rebound. That didn’t
happen, because year to date the postsecondary group is up over 60%.
Q: What are the key drivers in this space over the next couple of years?
Gary Bisbee: I think the drivers will continue to be similar to the
drivers we’ve seen over the past couple of years. Due to the positive
demographic backdrop, including a projected 15%-20% increase in total
student enrollment over the next decade, I think you’ll continue to
see most of the publicly traded postsecondary companies adding
somewhere between 5% and 10% new units per year. You’re going to
see new campuses open in addition to acquisitions. I agree that
we’ll continue to see a lot of those.
On top of new schools, I think the pricing environment continues
to look strong, again, due to the state and local fiscal issues
that we talked about earlier. So I think we should see a continuing
trend of new campuses and also active strategies to grow the existing
campuses. When combined with pricing and margin expansion I think the
model will be 15% student growth plus 5% pricing, which will give us
20% internal top-line growth, and with a bit of margin expansion
20%-25% earnings growth.
Big picture drivers for the industry and these stocks continue to be
the demographic outlook, the state funding issues that are leading
these companies to gain market share, and the online trend. As Gerry
said, they’ve done a great job of attracting nontraditional students,
or students who were not successful in the traditional school system.
So I think that another driver for these stocks will continue to be
the online opportunities that they have. While the growth rates
probably are unsustainable at the current levels, I think that a
lot of people have looked at the top line and haven’t focused enough
on both the profitability and capital efficiency benefits of the
online business model versus the campuses. Over time, I believe that
the stocks can maintain their current multiple as people realize that
the business model continues to improve.
So in general I think the drivers will continue to be things that
have driven growth in the past, which are good competitive positioning,
gaining market share, and continuing to innovate with online and other
Q: What share of the market do the for-profits have at this point,
and where can it go over the next few years?
Gary Bisbee: That’s a good question. By my estimate the for-profits
have about 5% market share in 2003 as a percentage of enrollment,
and that number is up from about 1% in 1980. So there have been steady
gains. My expectation is that 5% can grow to be 8%-10% over the next
decade, if not sooner. I think that the gains will be driven by pure
market share gains (mostly from the community colleges), in addition
to the for-profits’ ability to continue to attract nontraditional
students. Today, about one in four Americans over the age of 25 has a
bachelor’s degree, so there are somewhere on the order of 70 million
people in the US work force who don’t have a bachelor’s degree. While
most of these people are nontraditional students, I believe that the
for-profits have demonstrated that they focused on this group and can
offer a more convenient solution to these people. So I think they will
continue to grow.