A POTENTIAL 48% GAIN PUTS THESE EDUCATION STOCKS AT THE HEAD OF THE CLASS
(MONEY Magazine) – YOU KNOW THE BULL MARKET IS LONG IN THE hoof when a tightwad like me is attracted to three small growth stocks that each rose 100% or better in 1995. Yet I'm convinced that as long as the bulls don't take a header, there's a compelling rationale for these unheralded shares to appreciate another 48% on average by the end of '96. The impetus? Each caters to a potentially huge market of consumers fed up with America's most hidebound sacred cow--our $400 billion system of public education, ranging from elementary schools to state universities. (There are exceptions, of course; see page 108 for 100 topnotch public school systems.)
The largest of the three companies in terms of annual revenues is $229 million DeVry (ticker symbol: DV; lately $26). This 65-year-old Oakbrook Terrace, Ill. firm is a leading provider of degrees in technical subjects, such as electronic technology, mostly to high school grads who lack the skills to land even entry-level jobs in today's increasingly high-tech economy. Another pick is DeVry's rival, $202 million ITT Educational Services (ESI; $23), a 27-year-old Indianapolis firm spun off from $28 billion conglomerate ITT in '94. My favorite is $44 million Nobel Education Dynamics (NEDI; $12) of Media, Pa. Born 11 years ago as a chain of child-care centers, Nobel is deftly acquiring and converting preschools into accredited private elementary schools that are tailored to the needs of two-income families. For example, the schools provide child supervision from 6:30 a.m. to 6 p.m., vs. the typical public school day from 8:30 to 3. I was so impressed with Nobel's strategy that I bought 3,000 shares at $7 in June. The three stocks appear below in order of their projected '96 gains.
Buy Nobel Education. Nobel is the best way I've found to profit from the baby-boom echo--children born in a bulge of nest-building in the late '80s. They are now swamping many school systems that slashed capacity during the baby bust that ended in the late '70s. In metro New York City, where I live, the number of kindergartners is up almost 20% from 10 years ago. "Crowded classes are hot buttons for investors as well as parents," says Greg McCrickard, manager of T. Rowe Price's $270 million OTC Securities Fund in Baltimore. "Nobel is the first private educator to provide solutions at a price the middle class can afford."
Here's the math, according to Nobel chairman Jack Clegg. Of the firm's 101 facilities in 11 states, 13 in California have been upgraded to elementary schools (kindergarten through eighth grade). Over the next two years, Clegg aims to nearly triple that number to 36. He'll also add grades K through 2 to about 70% of Nobel's 51 preschools, which funnel pupils to its primary schools. Tuition averages $5,500. That's 17% below the typical $6,630 bill for private nonparochial schools and 13% less than the $6,300 spent per pupil in public schools. Still, Nobel's primary schools earn fat 22% profit margins. Reason: They aren't burdened by bureaucracy and attract seasoned teachers (56% have taught at least six years) for salaries averaging $22,000. That's 41% below the $37,000 average of public teachers. One draw is that Nobel's classes are smaller, averaging 17 students, vs. a public school norm of 24. "And we don't have to tolerate kids with disciplinary problems," says Clegg. Based on Stanford's standardized reading and math tests, Nobel students score an impressive one to two grades above their grade level.
What's today's $12 stock worth in a year? "I see at least $20, or 67% more," says Richard Sinise of Kennedy Capital in St. Louis, which manages $1 billion for large institutions. He and other sources think Nobel can nearly double sales and earnings in '96 by buying and upgrading mom-and-pop preschools on the cheap. How cheap? "We pay around five times pretax profits," says Clegg, owner of 9% of the stock. That's 75% less than Nobel's valuation of 22 times its pretax earnings.
Buy DeVry and ITT Educational. These two operators of technical colleges have similar prospects--forecast profit growth of 18% to 20% annually to the year 2000--and franchises that are well known for their integrity. The latter is crucial, because technical colleges are often associated with back-of-the-matchbook con artists. But about 45% of DeVry's 30,000 students, and 54% of ITT's 22,000, finish their studies--completion rates that are in line with those at four-year public and private colleges. Of course, the rate that matters most to career-oriented students is job placement, says analyst Elliott Schlang of Hancock Institutional in Cleveland. A hefty 91% of DeVry's graduates, and 85% of ITT's, find jobs in fields related to their studies within six months of earning a two-year associate's or four-year bachelor's degree. Master's degrees also are offered. Tuition for the school year averages $6,400.
DeVry and ITT are both expanding in step with two trends. Demographers say the number of new high school grads, which during the baby bust shrank from 3 million in '81 to 2.5 million in '94, could spurt 5% in '95 and hit 3.1 million by 2004, a 24% rise over 10 years. And many of those grads "will have to compete for jobs against experienced workers displaced by corporate U.S.A.'s decade-long downsizing," says Beth Dater, manager of the $440 million Warburg Pincus Emerging Growth Fund, which owns DeVry and ITT. "Both groups need modern technical skills to get ahead."
The key difference between the two stocks is that ITT Educational's trading volume of 5,000 shares a day is too skimpy to warrant attention by most analysts and institutions. Only 17% of the firm's 12 million shares can be traded; the remaining 10 million are held by parent ITT Corp. Not to worry, say my sources. The conglomerate is now splitting into three companies and, as a result, will likely sell its ITT Educational shares via a public offering in early '96. And don't fret about dilution--the shrinkage of current holders' slice of the pie--because the 10 million shares are already outstanding. In fact, my sources believe the offering will unleash institutions' pent-up buying power for ITT Educational's $23 stock. "A 30% rise to $30 in '96 is a layup," predicts Warburg analyst Kyle Frey. What about $26 DeVry, I asked colleague Beth Dater? "I think it's headed for $38," she says. That's a 46% profit, a report card any investor would covet in '96.
ALL STOCK DATA AS OF DEC. 6