Tuesday, June 05, 2007

Laureate Education's Buyout and For Profit Education

By Richard Vedder

Many educational traditionalists have thought that the for-profit higher education "fad" had peaked. After all, market leader Apollo (University of Phoenix) had slumping stock prices last year, amidst some questionable accounting practices and sharply slowing growth rates in enrollments. The feeling seems to be growing that the for-profit school market was becoming saturated. I have been skeptical of that argument, and markets are suggesting that there is plenty of life left in for-profit education.

This all came back into mind yesterday when I read in the Wall Street Journal (p. C3) that "Laureate Accepts Sweetened Buyout Bid." Laureate Education is the former Sylvan Learning Systems, and now has more than 262,000 students studying on its on-campus and on-line programs. The management of the company wants to buy out the stockholders --in a $3.82 billion buyout.

What is interesting about the price is that it represents close to 40 times the current annual earnings of the company -- a very high P-E ratio, one usually reserved for "hot" high tech stocks with extremely bright futures. In 2004, the company made $62 million on sales of $648 million, in 2005 it made $75 million on sales of $875 million, and in 2006 it made over $105 million on sales of $1.146 billion. This is not the sign of a company in decline, or one beginning to stagnate.

Not only are publicly traded companies expanding, but so are private firms not traded on stock exchanges (and the Sarbanes-Oxley law is providing perverse incentives for public firms to go private, as Laureate is proposing to do). I have worked with a couple of innovative firms that are booming, not only in the U.S. market but also abroad. Small liberal arts colleges are being bought by for-profits trying to get accreditation and using that to expand greatly, mainly on-line but also through on-site learning centers. The far greater efficiency inherent in market-based forms of educational delivery are increasingly allowing the for profits to compete head on with government or privately subsidized not-for-profit institutions. This is a trend that is to be applauded, not feared, as it introduces much needed competition into American higher education.


TC said...

With a multiple of 40, I'd say investment in this company loses some of its appeal. But, on the flip side, investors would be expecting higher earnings growth in the future. And that is where the buyout number, in part, must come from.

By the way, some institutional investors (Blackstone & Select Equity who hold [NASDAQ: LAUR] believe the price was too low!

This looks like an inefficient company if you look at the margins:

Gross margin (TTM) of 22.10%

Profit Margin (TTM) of 9.20%

Net Profit Margin (MRQ) of (– 3.94%)

Laureate is spending a heck of a lot of money to earn fairly little, and in the most recent quarter, they lost money.

Check out how Laureate compares to the industry at http://biz.yahoo.com/p/766mktd.html

One thing is for sure - there is a lot of money in play in this industry. Interesting post. I think I might look into this industry a little further.

BTW - My opinion of LAUR is based on a cursory look at the fundamentals.

TC said...

Another thought - I wonder how the business model for a "for profit" education company would overlay on a "not-for-profit" college or university. But I suppose the lack of transparency might prove difficult for such an analysis.