Friday, January 30, 2009

For Profit Colleges

Earlier this week, there was a controversial article at Seeking Alpha on the topic of For-Profit education companies. The companies discussed in this posting were DeVry(DV), Strayer (STRA) and Apollo (APOL). I responded to tthe original article by posting the following comments:

As an administrator at a major public university, I can say that we do not accept degrees from any of the online distance learning schools in this discussion. The University will not accept credits for transfer and it does not accept a degree from such an institution as a qualification for any position requiring a college degree. It may be that my employer is behind the times in matters like this but it seems from other comments, that employers in the private sector are not anxious to accept them either.

Something else to consider. Enrollments trends are only part of the story when looking at an educational instition. We also study retention and completion levels which we consider as important, if not more important, than enrollment. Our focus is getting our students through our programs successfully. If they do not stay in school or do not complete their program, we have failed in our mission.

The for-profit schools also lose out if they do not retain and complete students. The high turnover of students, the cost of acquiring students all effect their bottom line."

I then expressed my own opinion of value.

I wanted to comment on the valuation issue around APOL. I use a different methodology than used by others who expressed an opinion here. However, in my opinion, APOL has an estimated value in the range of $40.36 to $55.77 with an average estimated value of $46.73. For the record, I use multi-factor analysis. Additionally, I would use $4.89 as an estimated FCF."

Someone responded with the following comment.

sommer, i think you may need to add a couple more factors to your analysis. i have no idea what methods you are using, but on the surface it sure seems hard to use a FCF estimate of 4.89 and get a value in the mid-40s. i guess you could be using a 15% rate of return or assuming negative growth or something. otherwise that does not seem to make sense. the only way this stock is worth $40 is if citron is correct and there is massive fraud and misrepresentation of data. could be true, but don't think any valuation model is going to tell you that."

Okay, so this guy doesn't quite agree with me. I was actually using a rate of return of about 10%-11%, but what does it matter.

People seem to forget three things about valuations:

1. Valuations are estimates and not something carved in stone. There are multiple methodologies for calculation vale and they are all valid.
2. Valuations are all theoretical. The only true measure of value is what a willing buyer and and willing seller agree to when neither is acting under compulsion.
3. daily price movements are not about value. I happen to think that over time, prices move to value.

Based upon my own idiosyncratic methodology, I place a value of $45.93 on APOL and $14.77 on STRA. How Strayer can command a price of more than $200 is beyond me. The company is selling at nearly 30x free cash flow.

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