Investment conundrum: Not a class act

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In April 2009 we expressed concern that many for-profit online universities were “more interested in generating revenues for their parent companies than in providing a valuable education.” We gave readers a look at the strong-arm marketing tactics that these for-profit institutions employ. If that didn’t send you flying, then from an investment perspective, the stock value of publicly held online universities is something to consider in this recessionary market.

For-profit online universities lack the high overhead that public universities have. And these for-profit online universities attract hundreds of thousands of students, explains Paul Larson, editor at Morningstar StockInvestor. These factors led these online universities to score a double-digit growth rate in 2009.

Morningstar believes that three education companies have strong competitive advantages over traditional schools, and they trade at a discount to their intrinsic value. Strayer Education (Nasdaq: STRA; Price: $209.55 vs. $249) is the parent company of Strayer University. Apollo Group (Nasdaq: APOL; Price: $61.08 vs. $106) owns University of Phoenix and four other education providers. DeVry (NYSE: DV; Price: $62.62 vs. $81) operates DeVry University and four other education providers. Morningstar is not as keen on ITT Educational Services (NYSE: ESI; Price: $98.66), despite the fact that its stock is trading lower than its Morningstar valuation of $143. “ESI’s historical profitability and returns on capital were below the industry average,” although they have improved in recent years, Larson explains.