Monday, March 06, 2006

Getting an Education in Education Stocks

Education Management (EDMC) announced that it was going private, courtesy of two private equity firms, Providence Equity Partners and Goldman Sachs. The price, of $43 represents a valuation of almost 13 times EBITDA.

There is an excellent discussion of this news item in The Stalwart, which I recommend to you!

The Stalwart

What does this transaction mean for this sector? This sector has been beaten up as a result of ongoing regulatory investigations and what had been unrealistic growth expectations by the street. Various federal regulatory agencies and accrediting bodies have questioned the financing of student loans as well as the academic standards for these programs. Since 2004, there have been investigations by the Department of Education, the SEC, or various attorneys-general of ESI, CECO, COCO, and DV.

The successful closing of this transaction would endorse the viability of the for-profit education model. The valuation is about the same as DeVry (DV) paid for Ross University 12.4 times.

Each of these companies is unique in terms of its quality, its growth, and its management. Short term hiccups in growth seem to divert the attention of some analysts, unknown regulatory outcomes can surprise investors and reactions tend to be fierce and universal across the group.

But I am encouraged by the involvement of private equity firms here. It confirms that there is a place in the future for this sector. It confirms that the business model is reasonably predictable and there is opportunity for growth. Finally, the deal provides a template for other companies to consider as they mull their future strategy.

The risks in this sector cannot be overlooked, but I am encouraged by this development.

Here is a list of a few companies and their current valuation based on trailing twelve months EV/EBITDA as well as their price on a 12.4 multiple of EBITDA (2006 consensus forecast.)

Career Education (CECO) 6.48X $49.00

Corinthian (COCO) 10.51X $16.30

ITT (ESI) 13.1X $65.49

Disclaimer: Several clients are currently long CECO.


Post a Comment

<< Home

< ? Market Blogs £ >