October 22, 2008 / 6:21 PM / 10 years ago

REFILE-PREVIEW-US education cos seen reporting strong enrollment

 (Corrects to add U.S. in the headline)
 * Analysts see strong quarter for education cos
 * Expect higher quarterly enrollments
 * Qtr will expose impact of internal lending
 By Amulya Nagaraj
 BANGALORE, Oct 22 (Reuters) - For-profit education providers are expected to see a rise in quarterly enrollments as a weak job market drives students back to school, even as concerns about the credit crisis squeezing student loan programs linger.
 U.S. education companies are poised to gain from the weak job market as increasing number of adult students enter the education system seeking to improve their current job situation or to change careers.
 Growth in enrollment helps drive margin gains and boost earnings for the companies.
 “We believe the for-profits will post healthy enrollment and start data as the weak job market is driving many to school to re-tool and make themselves more marketable,” Merrill Lynch analyst Sara Gubins wrote in a note to clients last week.
 However, uncertainty in the financial markets is forcing wary loan providers to exit the student loan market, creating concerns about the availability of sufficient loans in the fall.
 “Student lending is the key overhang; federal loans are available while the private loan market remains challenged,” analyst Gubins said.
 The U.S. government’s move to temporarily inject liquidity into the secondary market for student loans, which had seized up after investors were spooked by the subprime mortgage crisis, has partly assuaged worries.
 The legislation has reduced education providers’ exposure to the private lending market, while allowing more students to have access to loans.
 “Despite concerns regarding the funding environment, we expect little, if any, adverse impact on third-quarter enrollment trends for most for-profit providers,” BMO Capital Markets analyst Jeffrey Silber said in a note earlier this month.
 The analyst estimates that enrollments increased for most companies at low- to mid-double-digit rates in the quarter.
 The Standard & Poor’s education services index .GSPEDUS has fallen 15 percent so far this year, largely on investor concerns that enrollment growth might be soft amid the credit squeeze.
 ITT Educational Services Inc ESI.N will kick off earnings season for the post-secondary education industry group when it reports results on Thursday.
 Companies, such as Corinthian Colleges Inc COCO.O and Lincoln Educational Services Corp (LINC.O) with relatively inexpensive non-degreed and shorter programs that have limited funding issues, are expected to benefit the most from the slow economy, Silber said.
 However, many students are unable to access loans, despite being academically qualified for programs. Some of the companies have filled this void through their internal lending programs.
 This quarter’s earnings will determine how much the companies’ balance sheets are affected by internal lending, a rise in which could lead to an increase in allowance for bad debt and hurt free cash flow.
 Corinthian is highly exposed to the private lending crunch and has raised its internal lending program, but demand for most of its programs is increasing and will likely continue to do so in the sluggish economy, Silber said. He expects earnings growth to continue to be solid.
 “While it will have an impact on margins in the short term, it is the right decision to fund these students internally,” Barrington analyst Alexander Paris, Jr. said, adding that the fall term is the most significant term for post-secondary education.
 Apollo Group Inc APOL.O, the operator of University of Phoenix, is expected to have a growth in enrollments in Axia, which offers online programs and had reported a higher rate of dropouts earlier this year.
 Despite the Axia program dropouts, UBS analyst Andrew Fones said he expects the company to have a 10 percent to 12 percent revenue growth over the next five years.
 “While growth is likely to slow a bit as growth in Axia slows, we still expect the company to grow in line with most of its peers,” analyst Silber said.
 ITT Educational, a provider of post-secondary degree programs and which previously had the largest exposure to private lending among education providers, recently raised its 2008 earnings forecast to $4.65 to $4.75 a share.
 “The increase in expectations is directly related to the recent passage of legislation that increased federal student loan limits,” Paris said.
 Analysts also see DeVry Inc DV.N, a provider of associate, bachelor and master degree programs, posting strong growth in enrollment, but expect margin expansion to slow due to higher expenses as it invests in future growth.
 BMO’s Silber said the company’s margins can continue to rise after an “investment year” in 2009, though it might not be the sort seen in recent years. COMPANY NAME                CONSENSUS VIEW#
                       EPS pre-ex*   Revenue    Reporting date Apollo Group Inc            $0.67       $801.7 mln    Oct 28 DeVry Inc                   $0.44       $294.5 mln    Oct 23 ITT Education Corp          $1.17       $251.0 mln    Oct 23 Strayer Education (STRA.O)  $0.81       $87.1 mln     Oct 30 Corinthian Corp             $0.07       $286.4 mln    Nov 5 Lincoln Educational         $0.21       $96.2 mln     Nov 5
 #According to Reuters Estimates
 *Per-share view  (Reporting by Amulya Nagaraj in Bangalore; Editing by Deepak Kannan)   

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