Just When You Thought The News Could Not Get Any Worse...

GAO investigations, lawsuits, regulatory scrutiny, well, add disgruntled investors to the list now.  Investors are taking most companies in the for-profit education sector to the woodshed again today.  I thought it might be useful to see how we got here by focusing on events over the past three weeks, which included a slew of earnings announcements, new Dept. of Education rules and new investigations/reviews from state, Dept. of Education and the SEC. 

Before taking apart the events of the few weeks, I thought it was instructive to see how the stock prices of the leading companies in the industry had performed over the past three months (hint:  it ain't pretty):

	8/4/2010	11/4/2010	Change
Apollo Group	$      44.76	$      35.38	-21.0%
DeVry	$      52.44	$      46.58	-11.2%
Strayer	$   227.40	$   132.91	-41.6%
ITT Educational Services	$      78.93	$      58.42	-26.0%
Educational Mgmt.	$      14.31	$      13.03	-8.9%
Career Education	$      23.96	$      17.20	-28.2%
Capella	$      89.70	$      53.21	-40.7%
Corinthian	$        8.44	$        3.97	-53.0%

August 4th has significance as the date that the Senate held a hearing on the recruiting practices at for-profit institutions, at which witnesses (from Bloomberg) indicated that "For-profit college recruiters pressured students to sign up for courses and lied about the cost of programs to boost enrollment."

Here is what has happened over the past few weeks:

• Slowdown in new enrollment starts...
  • University of Phoenix forecast a 40% or greater decline in new starts for their current quarter.  This startling development from mid-October became the canary in the coalmine for the earnings announcements that followed.  Note that none noted as dramatic a drop in new starts. 
  • DeVry (from conference call):  "...we expect to report a modest decline in new student enrollment for undergraduate students in this period."
  • Corinthian Colleges (from conference call):  "15% of total enrollment or 15,000 to 20,000 students going away over time since Ability-To-Benefit students will no longer be enrolled."
  • Strayer saw a 2% decline in new student enrollment in the most recent quarter
  • Capella (earnings announcement):  "New enrollment is anticipated to be slightly down from fourth quarter 2009, due to an increasingly challenging external market environment and our continued focus on attracting high-quality learners prepared for Capella's rigorous academic experience," said Steve Polacek, senior vice president and chief financial officer.
  • Career Education Corp (from Dow Jones):  "Career Education said it expects fourth-quarter new-student enrollments flat to up by low single digits on a percentage basis compared with the prior year...Total enrollment in the third quarter grew 16%, while new-student enrollment increased 6%. That compares with new-student gains of 18% in the prior quarter and 19% in the year-ago period."

• Regulatory risk
  • The Department of Education released their final rules addressing program integrity issues on October 28th.  Note that rules on gainful employment were postponed for now.  Among the new rules:
    
    • Improved disclosure:  "Establishing requirements for institutions to disclose on their Web site and in promotional materials to prospective students, the on-time completion rate, placement rate, median loan debt, program cost, and other information for programs that prepare students for gainful employment in recognized occupations."
    • Elimination of safe harbors for incentive compensation:  "For these reasons, we believe it is appropriate to remove the safe harbors and instead to require institutions to demonstrate that their admissions compensation practices do not provide any commission, bonus, or other incentive payment based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid to any person or entity engaged in any student recruitment or admission activity or in making decisions regarding the award of title IV, HEA program funds."
      • Here is SLA's analysis of how this change impacted the industry the first time incentive compensation was banned.

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  • Program reviews from the Dept. of Education
    
    • Apollo group had this to say in an 8-K filed today:  "Apollo Group, Inc. announced today that it has been informed by the U.S. Department of Education that the Department intends to conduct a program review of University of Phoenix’s administration of federal student financial aid (Title IV) programs in which the University participates. The review, which is scheduled to commence December 6, 2010, initially will cover federal financial aid years 2009-2010 and 2010 to date.

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  • 90/10 regulations:  Corinthian on their conference call discussed future tuition increases as high as 20% to comply with 90/10 regulations (SLA commentary:  how many industries can you think of where you deal with slowing growth by raising prices to your customers by 20%...how would students be able to pay for this increase?  More private loans of course, that we know will default at high rates if history holds true).  They noted on their call (my paraphrase) that "81.9% of revenue was derived from Title IV funding; without 90/10 relief, the figure would be 89.8% and 42 out of 49 of their OPEIDs would have been over the 90/10 threshhold."

• Investigation/Litigation
  • Career Education Corp. settled a lawsuit with students at their culinary school:  "The legal settlement involves its California Culinary Academy. In 2007, 37 current and former students sued the school and Career Education for fraud, alleging that culinary school misrepresented its reputation and employment prospects for graduates, according to the company’s public filings. A second lawsuit with similar allegations was filed in 2008.  The settlement of both suits is subject to court approval. The settlement will pay claims by all students who enrolled and/or graduated from the culinary school from Sept. 28, 2003, through Oct. 8, 2008."

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  • On October 26th, Apollo Group mentioned that it had received a request for additional information from the SEC in this 8-K filing:  "Today, Apollo Group, Inc. announced that it has received from the Enforcement Division of the Securities and Exchange Commission a request for additional information in connection with the Division’s ongoing informal inquiry regarding Apollo Group. The most recent inquiry requests information regarding, among other things, Apollo Group’s insider trading policies and procedures, a chronology of the internal processing and availability of information about the U.S. Department of Education program review of University of Phoenix commenced in early 2009, and certain information relating to non-Title IV revenue sources.  Apollo Group continues to cooperate fully with the Division in this inquiry.
    • The New York Times wrote about this issue on Sunday
    • On November 1st, the company announced in an 8-K filing that "Dr. John G. Sperling, the Executive Chairman of the Company’s Board of Directors, and Peter V. Sperling, the Vice Chairman of the Company’s Board of Directors, had each adopted prearranged stock trading plans in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and the Company’s policies with respect to insider sales." 

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  • WFAA.com in Dallas reported on falsification of employment records at an Everest College campus there:  "This fits into a pattern of student disappointment and deception that News 8 has discovered repeatedly in a five-year investigation of for-profit schools.  Both Ms. Tanwar and Mrs. Praay were shocked to find out that as far as Everest College was concerned, they were employed.  Ms. Tanwar and Mrs. Praay, according to records filed with the state, worked for two companies — one called Paramount Multi-Services, the other, Alexus Dutchess.  "I never heard of them," said Ms. Praay, referring to Alexus Dutchess.  "I never worked at Paramount Multi-Services," said Ms. Tanwar. "And Everest never got me a job."  A News 8 investigation finds that the employment records of 288 former students of Everest were falsified over four years by the school...Alexus Dutchess turns out to be a paper company, used by Everest's former career services director Irma Spears. The company was created by Katherine "Dutchess" Henderson, a friend of hers.  Paramount Multi-services is shown as employing 112 former Everest students. That company did exist, but it never provided 112 jobs to students, as records show."

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  • In mid-October, the Florida attorney general began investigating five for-profit education companies (from the Chronicle):  "Florida's attorney general is investigating five for-profit colleges for possible misrepresentations about financial aid, deceptive recruiting tactics, and other practices, an official confirmed on Tuesday.  According to listings on the attorney general's Web site, investigators are seeking information from Argosy University, which is owned by the Education Management Corporation; Corinthian Colleges' Everest College; Kaplan University; the MedVance Institute; and the University of Phoenix.  The investigation will try to determine whether the colleges have violated Florida's law prohibiting deceptive or unfair business practices, said Ryan Wiggins, a spokeswoman for the attorney general."

• Here are a few of the strategies/tactics that schools are implementing in this new environment:
  • University of Phoenix:  Introduced three week, non-credit University Orientation for all new students without 27 transfer credits.    
  • Corinthian:  no longer enrolling Ability-To-Benefit (ATB) students, that is, those students without a high school or GED degree.  These students drop-out and default on their loans at a much greater rate than non-ATB students.  Corinthian also noted their significant investments in a public affairs campaign, as well as additional costs to more effectively manage defaults.
  • Career Education:  According to Dow Jones, the school is shifting students away from programs that may have difficulty qualifying under gainful employment rules:   "Pre-empting the rules' release, the company stopped adding new students to its large medical coding and billing program, instead offering spots in a broader health administration degree program in an effort "aimed at further optimizing potential employment opportunities for graduates.
  • DeVry doesn't anticipate making major changes:  "However, we aren't making large operational changes in anticipation of the new rules. Part of the reason for this is that DeVry is always focus on quality even though that it meant slower growth sometimes. For example, DeVry University is not an open enrollment institution. So we already turned away applicants who don't meet our admission standards. It's not like we're now for the first time having to implement these kinds of quality standards and having to go through a long process of figuring out what works."
  • Strayer noted their pricing power and plan to raise prices by 5% come January 1:  "The gap between the earnings of the college degree and the employment level, differential between people with the college degree versus high school degree is widening, the longer the period of the downturn. So if anything, I think that there is more inherent pricing power."
  • Capella toughening their enrollment standards at their online university (Star-Tribune):  "Capella Education Co. told Wall Street Tuesday that enrollment growth at the online university would slow as it toughens enrollment standards. Investors slashed more than $12 a share off the stock, which closed the week at $54.89."

Stay tuned...as for whether a Republican House of Representatives will make a difference, Bloomberg News had this to say: 

"For-profit colleges, whose stocks have lost 35 percent this year, are likely to get help from Republicans to ease limits on federal grants and loans that provide the bulk of education companies’ revenue.  Republican Representative John Kline from Minnesota, in line to become chairman of the House Committee on Education and Labor, has criticized a proposed U.S. Education Department regulation that ties for-profit colleges’ eligibility for student aid to whether graduates pay back their loans. The department today began two days of hearings on the so-called gainful employment rule...Republicans may seek to soften the rule either by negotiating with the administration on its other goals, such as expanded early childhood education, or by advancing legislation to revoke some of or the entire proposal, Price said. Either approach will present a challenge, he said.  “It’s unclear whether Republicans can bring gainful employment to the horse-trading block,” he said. “It’s an uphill battle for them to get legislative proposals past a Democratic Senate filibuster or a presidential veto.”

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