Future Of Education Part 1: America’s Toxic For-Profit Universities You Should Short

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Alex Clifford

Oct. 13, 2015 3:11 PM ET

http://seekingalpha.com/article/3569426-future-of-education-part-1-americas-toxic-for-profit-universities-you-should-short?li_source=LI&li_medium=liftigniter-widget

Summary

Poor quality courses, extreme pricing and poor job placement numbers have led to falling enrollment numbers. These institutions are bloated, toxic and complacent – with little innovation. Better, low-cost alternatives are arising and will surpass these colleges.

This is the first part of a series based on the Future of Education. I’m exploring the underlying trends in the education space you can profit from. Follow me to get the following parts.

Debt, misery, “the biggest mistake of my life.” This is what America’s biggest for-profit universities have brought their students according to reviews (see lower down).

It’s a shame. Americans want to better themselves, improve their skills and dream of a better future. It’s human nature. Tapping into that desire, for-profit colleges have exploited their students for a long time.

Aggressive, malicious marketing and sales practices have enrolled large numbers into poor quality courses. Then, with government-backed loans, private colleges have been able to charge extremely high tuition. Then, since courses have been so poor large numbers of students have been unable to find jobs after graduation, leaving them with huge debts they cannot repay.

American students are seen by these institutions as huge cash cows. Thus, a huge infrastructure, bloated bureaucracy and toxic culture has emerged.

Ultimately this will lead to these companies’ demise. And falling enrollment numbers prove this is already taking place.

I also believe that this decline has much further to go and these companies will not turn around because they are so entrenched. They don’t have the DNA to innovate.

The case for bad colleges

I would encourage you to watch this video from comedian John Oliver. He makes the points much better than I ever could. The video is 16 minutes long and should make you laugh (so it’s worth it).

click for video on YouTube

click for video on YouTube

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     X If you don’t have to time to watch it. This is killer line:

“Most students would have been better off studying Engineering at Hogwarts, because then at least they would have had an owl to show for it.”

If you prefer your journalism more serious, PBS did a documentary on “College Inc.” which you can watch below by clicking the picture.

click to watch video on PBS' site

click to watch video on PBS’ site

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How to profit from this trend

You need to short the companies that own these colleges. The two largest publicly-traded companies are DeVry (NYSE:DV) and Apollo Group (NASDAQ:APOL). At the time of writing DV had a market cap of $1.8 billion and APOL had a market cap of $1.2 billion

DeVry owns Carrington College, DeVry University, Chamberlain College of Nursing, DeVry Medical International and DeVry Brasil.

APOL owns the notorious University of Phoenix and other smaller institutions, including Western international, Carnegie Learning, College for Financial Planning and a few small international universities.

Before I make the financial case for shorting this company. I’d like to share some student reviews with you about these colleges.

Reviews from DeVry

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Reviews from University of Phoenix

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Alternatives to college

So far we’ve looked at how for-profit colleges are failing students. Now I want to examine the alternatives. In an developed economy there will always be a high demand for education. But since these traditional means are not only failing, but exploitative, there are much better alternatives.

In a future part I’ll explore how we can get into innovational education companies.

50 Alternatives To College by James Altucher gives non-college options that will happier, healthier and richer. This is what one reader said:

“I wish I had read this book six years ago, before I wasted those years accumulating $130,000 in debt without acquiring any real skills. I feel cheated, I’ve lost some of the most crucial time in my life.” – Tom

Udemy – Offers excellent online courses that are extremely cheap compared to college, and they teach practical marketable skills in a short of period of time.

Skillshare – Like Udemy, but based on a subscription fee, offering an unlimited number of courses.

Italki – A marketplace connecting language learners and teachers. You can get excellent teachers for $10/hour

Uncollege Gap Year – An intensive experiential education that aims to connect you with all the resources, skills and professional connections you need to thrive in your career. Friends have described it as the “the education of future millionaires.” (Disclosure: I’ve been on this and I found it very useful. I also wrote a case study about one of my alumni, Taylor who’s created a career in fashion from it.)

General Assembly – Code, design and marketing school based on real, practical knowledge. Within a few weeks of training, graduates are being offered well-paid technology jobs.

Unfortunately as investors most of these alternatives are still privately-held companies.

But what this is shows is there’s a belly of thriving startup innovation in education. These companies are extremely innovative, fast-moving and effective. They’re delivering superior life outcomes for their students, at much lower cost and shorter time frames than their traditional university counterparts.

Old for-profit universities don’t stand a chance against these alternatives because their culture is so toxic and slow. They will never be able to innovate at the same pace because it’s not in their DNA.

The financial case for shorting

I wish I had shorted these companies a few years ago. Their stock prices are approximately 80% lower than their peaks in 2012. You might be cautious given they’ve fallen so far, but I think these companies have much further to fall because of the reasons mentioned above.

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The University of Phoenix makes up nearly all of Apollo’s student numbers. Enrollment has fallen 14.5% in the past year at the University of Phoenix, from 241,900 to 206,900 according to a recent earnings report.

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Likewise at DeVry University enrollment has fallen 13% in the past yearaccording to the latest earnings report. At DeVry’s other US universities, enrollment has remained fairly static.

What’s also worth considering is what these companies carry on their balance sheets.

Of $1.5 billion in assets, DV counts ~$800 million in goodwill and intangibles. (Source: 10K)

APOL likewise carries $405 million in goodwill and intangibles. (Source: 2014 Annual Report)

The question is, what are these intangibles and goodwill? If these institutions have anything, it’s bad will. As their business models begin to fall apart, as I bet they will, I believe that these companies will have to charge off the goodwill and intangibles because they won’t be worth anything in a market that’s changed so much.

The risks of shorting these two

Of course I want to explain the counter argument to these trades. DeVry has a growing student base in Brazil, and I’m relatively positive about this move. There is a lack of tertiary education in developing countries, and education providers like DeVry can fill the gap. However, I doubt it will be the cash cow that the American institutions have become because education loans are less prevalent and therefore tuition must be more affordable.

DeVry could slow its demise if its Brazilian operations are very successful.

APOL is equally trying to expand outside of the US. Schools like BPP that it established in England could help it grow, but again it won’t be as easy and as profitable as its US operations.

However, I think given that it has over 200,000 students at the University of Phoenix – and hemorrhaging them fast – I see very little upside for APOL.

You also may argue that these dismayed students are just one offs. Some courses are good quality, delivering good results. I recognize that point. However, there’s a lot of bloat to cut from these institutions and it will be a long time before that this is recognized. These companies are in a death spiral.

You also could argue that most of these student declines are priced in to the valuations already. I disagree. Most investors expect a turnaround, but what they fail to recognize is the degree of toxicity and poor management that fill these institutions.

The catalyst

University education is broken in the US. Students have been exploited by bad courses, aggressive marketing and over-priced tuition made available by government-backed loans. It’s a poor product at an extremely high price.

As new education alternatives rise in prominence, enrollment will continue to fall. I believe new data showing student number declines will be the catalyst for further stock price falls.

Since these institutions are very static and unresponsive – long term I see these institutions as dinosaurs. I’d recommend building a short position over the coming weeks and months.

I have price target of $4 for Apollo and $9 for DeVry, anticipating falls of approximately 60-70%.

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