Wednesday, December 31, 2008

An Oasis in the Equity Market Desert

By Richard Vedder

Equities in 2008 averaged share prices down around 40 percent, one of the worst drops in U.S. history. Yet the for profit higher ed sector seems to be holding up remarkably well. DeVry, an old traditional company, has it stock price now roughly double what it was five years ago. Apollo, the industry leader (U. of Phoenix) is also doing well, showing record sales and earnings.I have seen some positive financial data on Kaplan Higher Education that is truly breathtaking, and that company is the financial savior of a parent company better known for its newspaper (the Washington Post) and magazine (Newsweek).

Now there has been revealed data on one of the rising new stars, Bridgepoint Education, a company whose corporate board I have spoken too on multiple occasions. It is going public, and new SEC filings tell a story of extraordinary growth and profitability. In 20005, revenues were $8 million and losses were even greater. In 2006, revenues claimed to beyond $28 million and losses fell significantly. By 2007, sales had tripled again, and the firm made a modest profit. It looks to me as if sales this year will exceed $200 million, with profits equal to around one-tenth that amount. Rapid growth and taking advantages of large economies of scale, Bridgepoint has first rate leadership (Andrew Clark looks like a graduate student, but is a superb motivator and leader and former Apollo executive).

The Bridgepoint strategy seems to be a winning one. Buy up accredited existing not-for-profit institutions. Use these institutions as a vehicle for vast expansion, especially into on-line education (although Bridgepoint still has students residing on the campus of a former Catholic school renamed "Ashford University.") By buying accreditation, these institutions save time and hassle dealing with the cartels controlling entry into the field (accrediting organizations), although this strategy requires millions in start-up money.

Other initiatives, including privately held companies of Texas entrepreneur Randy Best, are also showing rapid growth. The huge advantages in efficiency that the for profits have are letting them rapidly expand market share and force conventional providers to start to act in a more entrepreneurial fashion, and become more lean and mean. This is a welcome development. The heck with US News & World Report rankings --these companies are making real money, and precisely because they are providing a service much wanted by the general public.

To readers of CCAP blogs and our friends, we wish you the happiest of New Years!!

1 comment:

capeman said...

Ah, this guy Clark was apparently associated with Career Education (CECO), a company in which I own stock. They got in all kinds of legal trouble some time back and have never really recovered, certainly not the stock price.

But let's examine the main claim of this post:

"The huge advantages in efficiency that the for profits have are letting them rapidly expand market share and force conventional providers to start to act in a more entrepreneurial fashion, and become more lean and mean."

Not a lot of evidence offered. But Ashford University does not appear to be especially cheap, the residential campus, when you add up all the tuition and fees, something over $16,000 per year is what I come up with. (This does NOT include room or board.) More than the real expenditure per student at the modestly financed public university where I work (counting the state subsidy and leaving out things like research). $16K is about the going rate for marginal private colleges. The academic offerings are mostly in fields where you'd expect to be able to make a profit. Physics major? I don't think you'll find it, I couldn't. Nor chemistry. What is offered looks pretty thin to me. I don't want to knock any school, but this doesn't look especially impressive to me. Maybe an entrepreneur buying up dying schools before they croak can make money at this, but this is not exactly going to scare any of the schools making a go of it, either private or public.

Here where I work, enrollment is up way more than expected. Nobody, but nobody is worried about either online or for-profit schools.

The Doc's obsessive hatred of higher education may find fulfillment with operations like Bridgepoint, it may even be a going concern. But as a threat to traditional higher education, it just looks like a fantasy.