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Making Money with Joel Greenblatt Bargains: Educational Stocks (ESI, DV, STRA, APOL)

September 26, 2011 | About:
President Obama gave his weekly radio and video address Saturday morning, calling education reform an essential part of economic recovery. While I think this view is built around hidden agendas and not reality, it does bring into focus the idea of higher learning as a business.

A recent Google Finance screen shows that four stocks in this industry that have seemingly rock solid valuations and have traded lower over the course of 2011. And, they are all owned by Joel Greenblatt. This could be a great combination for investors going forward.

The four educational stocks that fit this criteria are Strayer Education (STRA), ITT Educational (ESI), Apollo Group (APOL), DeVry Inc. (DV). This article will examine them briefly and hopefully point out if any or all are worth owning at their current prices.

Industry Thoughts

Many educational institutions have somewhat of a local monopoly within their state, with prestigious university like such as Harvard, MIT and Stanford having a durable advantage over most state schools. This helped them charge more per credit hour, but with the rise of inflation, so too have we seen the rise of the cost to receive a college degree across the board.

The government has made it very easy to acquire college loans by safeguarding them with specific guarantees. For publicly held colleges, this does make it easier to earn a profit. The reason these companies could be a value trap is because just like other competitive industries that rise artificially due to government guarantees (i.e., real estate), education prices will become too expensive for the masses due to lack of competition.

However, after a closer examination of the above companies, we see that guru investor, Joel Greenblatt owns a small portion of each.

#1: Strayer Education (STRA)

Strayer University was founded as a small business college in 1892 by Dr. S. Irving Strayer. Today, it offers undergraduate and graduate degree programs via both campuses and the Internet.

10-Year Financials:

ROE - 38%

ROA - 22%

NPM - 20%

Sales Growth - 583%

Profit Growth - 469%

Book Growth - 36%

Price to Cash Flow - 6.5

Forward P/E Ratio - 11.3

SG&A to Gross Profit - 49%

Greenblatt's Position: 30,463 shares (down 37%)

#2: ITT Educational (ESI)

Founded in 1947, ITT Educational Services Inc., is a private, post-secondary education provider, with 80 colleges operating in 30 states.

10-Year Financials:

ROE - 112%

ROA - 27%

NPM - 16%

Sales Growth - 300%

Profit Growth - 1,000%

Book Growth - 258%

Price to Cash Flow - 3.4

Forward P/E Ratio - 7.9

SG&A to Gross Profit - 42%

Greenblatt's Position: 93,363 Shares (Down 18%)

#3: Apollo Group (APOL)

Apollo's flagship subsidiary, University of Phoenix, is the largest private university in the United States. Its market focus is the working adult student, or working learner. The average working learner enrolled in its classes is 34 years old and earns between $50,000 and $60,000 per year.

10 Year Financials:

ROE - 43%

ROA - 21%

NPM - 13%

Sales Growth - 540%

Profit Growth - 430%

Book Growth - 122%

Price to Cash Flow - 6.6

Forward P/E Ratio - 13.1

SG&A to Gross Profit - 51%

Greenblatt's Position: 160,643 Shares (Down 1%)

#4: DeVry Inc. (DV)

Founded in Chicago during 1931, Devry began as a school that prepared students for technical work in electronics, radio and, later, on television. In 1991 it became the first publicly held education provider and over the next 20 years, it moved into finance and healthcare education to adjust to the changing marketplace.

10 Year Financials:

ROE - 15%

ROA - 10%

NPM - 9%

Sales Growth - 237%

Profit Growth - 395%

Book Growth - 332%

Price to Cash Flow - 6.8

Forward P/E Ratio - 8.5

SG&A to Gross Profit - 60%

Greenblatt's Position: 40,261 shares (down 19%)

Commentary

Again, Mr. Greenblatt hardly follows his "buy 30 stocks and hold them for a year" philosophy, but his track record cannot be disputed. Thus, we should be keenly interested in what his fund owns. ITT Educational Services (ESI) and Apollo Group (APOL) are his largest for-profit educational holdings and in my opinion the best of class in this industry.

Apollo derives most of its earnings online through the University of Phoenix — which has over 400,000 students enrolled and is still known as the most recognized online college. The company has steadily grown sales, income and book value, while regularly buying backing shares since 2004. Plus, the founder still owns over 11% of the stock, despite selling more than 250,000 shares in the last several months.

ITT on the other hand offers a niche with its Technical Institute that is sure to be around for future decades. The one warning sign with ITT is that in the last decade bottom-line growth has outpaced top-line growth, which could be a key indicator that the company cannot keep up the trend. However, if either of these stocks earn close to what they are right now, the market should re-evaluate them higher. That alone should be enough to outperform the market over the next year.

Truth be told, Greenblatt's magic formula could be a big advantage to investors right now in this industry because the four holdings above are all down from when he bought in. So, whether you want to own just one stock or all four, it would be a good idea to put at least a small portion of your assets into this sector. Each of the four companies detailed in this article has done a good job allocating capital in bull markets and bear markets, so eventually the price should reflect that.

About the author:

Jonathan Poland
Since 2002, I've worked with investors all over the world. Between 2009 and 2010 worked with GuruFocus to start their investment newsletter service.

Visit Jonathan Poland's Website


Rating: 3.3/5 (12 votes)

Comments

Jonathan Poland
Jonathan Poland - 2 years ago
Had you bought the four stocks above at the prices they were trading for when this article was published, you would have earned 9% pre-tax. The S&P 500 and Dow Jones did slightly better...

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