I’d been meaning for some time to write about the for-profit education business, epitomized by APOL. It’s an interesting phenomenon, although one whose reputation–and stock prices–are in tatters. On a day when the best thing I can figure to do is to try not to make stock market trades I’ll regret in a week or two, I’ve got the time. Here goes:
The idea behind for-profit education is to provide post-high school training, leading either to an Associates, Bachelors or graduate degree or to technical certification in a trade, to students who are not well served by traditional state or private universities. Typical students might be already working full-time, not living near a traditional university or unable to gain admission to one.
APOL and its for-profit competitors cost less than traditional schools. Gaining admission wasn’t difficult. Students could go part-time, either completely online or with a mix of internet and locally-situated physical classes. Federal Title IV education loans were readily available. What’s not to like?
About a quarter of for-profit students have been active-duty members of the Armed Forces; there’s a significant percentage of minority students as well.
Although they had been around during the Nineties, for-profit schools burst onto center stage for professional investors in 2000, in the aftermath of the collapse of the internet bubble, when they were scrambling to find any alternative to cratering tech and media stocks. In early January 2000, for example, APOL was a $9 stock. By 2004 it was close to $100 a share. It closed last Friday, before announcement that APOL had accepted a $9.50 buyout offer, at $6.95.
What caused the round trip?
–traditional colleges and universities adjusted to the threat posed by non-profits, and began to offer online or low-residency programs of study themselves
–in a quest for enrollment growth, for-profits began to recruit aggressively. Their marketers seemingly transformed education into an impulse purchase by not-so-dedicated, not-so-qualified students. In any event, for-profits began to experience high drop-out rates. A cynic might argue that this was the ideal profit scenario–having students who paid tuition but then didn’t use any school services. However, these students felt victimized. They typically also left behind Title IV loans they were no longer willing to repay. That resulted in reputation-damaging congressional inquiries and in legislation aimed at ending predatory recruiting practices. Questions about the integrity of the business, as well as the availability of other growth-stock options, caused portfolio investors to look elsewhere–creating price-earnings multiple contraction.
I haven’t gone through the APOL financials carefully and I have no intention of doing so. A quick look says the company, which is being bought out for $1.1 billion, has virtually no debt and $1.2 billion in cash and cash-like securities on its balance sheet. These assets are offset by about $420 million in student deposits and deferred revenue, meaning payments made for courses that are either in progress now or not yet taken. Just staying in business for a semester or two should eliminate these liabilities. As I read the situation, the acquirers are paying only for today’s balance sheet, nothing for APOL’s future potential as a business. Knowing nothing about the situation, I wonder why anyone would want to sell.