Monday, September 21, 2009

Stacking Up the EDMC IPO with Apollo Group

The story of the recession has been consistently: financials, manufacturing, and automotive are the key laggards; healthcare and education have been the bright spots. Firms such as Apollo Group (NASDAQ:APOL), owners of the University of Phoenix, and DeVry, Inc (NYSE:DV) have been leading the charge as the largest players in the for-profit education sector. While the S&P 500 is down 28% since the start of 2008, Apollo Group and DeVry are up 6% and 10% respectively. It is curious as to what this will mean for the IPO of Education Management Corporation (to be NASDAQ:EDMC) on October 1st.

Why have Apollo and DeVry been so resilient? Common knowledge would say that as unemployment rises, workers want to return to school to increase their skill set. Traditional non-profit universities filled this void in previous recessions; but for-profit schools (with looser acceptance standards) allow for an easy entry.

Search backs this story strongly. Searches for “university of phoenix” and “devry university” back the trend that their parent companies have benefited in stock price. Consumers are turning to these programs. This creates for an interesting story with EDMC whose top brands are Art Institute and Argosy University.

Taking a look at searches for Argosy, it appears to follow the trend (accelerating through Q3 even). This could bode well for the $18-$22 asking price.

The outlook is not as promising for the Art Institute, however. Searches for the school which builds graphic designers, among other categories, has been in a decline. EDMC reports that revenues grew 19.4% for the year ending June 30, 2009. The specific schools have not been identified, however. APOL has not released their numbers for the same time period, but through their first 3 quarters of reporting in their fiscal year, they have already met 92.2% of last year's revenue. Staying in line for Q3 revenue would put APOL at a 26% growth rate y/y.

It is important to keep a pulse in the long run on where these schools lay relative to each other regardless of the direction that EDMC takes on their IPO on 10/1. When taking your picks in the education space, keep consumer interest in mind. The most telling comparison may lie in the breakout between Apollo’s University of Phoenix and EDMC’s top 2 stars.

Whether you think education is a bubble or not, the searches do not lie. Apollo’s University of Phoenix does appear to be top of mind for consumers.

Tuesday, September 15, 2009

How Internet Data Fuels the Health Care Debate

There has not been a day in the past weeks that has passed without a mention on CNBC or Bloomberg about the current health care proposals underway by the Obama administration. The bottom line issue: health insurance has become too expensive for Americans.

It has become a hot button issue, one dividing strong political lines. Amidst the turmoil, top health insurance providers such as UnitedHealthcare Group (NYSE:UNH) and WellPoint, Inc (NYSE:WLP) have seemed to remain resilient throughout. Why the resilience?

Most analysts would argue that the extremely high uncertainty around the health care debate is keeping these tickers stagnant. The uncertainty is rooted in that deep dividing line and will hopefully lead to a deeper understanding into why health insurance has become unaffordable for the 10% of Americans who cannot afford coverage.

The most eye-popping statistic comes when comparing medical costs to CPI:

Indexed to 1982 Value



Cost of Hospital Services































Total % Change



Source: Centers for Medicare and Medicaid Services, Office of the Actuary

This has posited a nearly impossible situation for the health insurance providers, dubbed as “profiteers.” While hospital costs are not the full picture of what goes into health coverage, it is difficult to imagine a scenario where the cost of premiums could not have increased at a 6%+ rate each of the past ten years.

Search data shows us the resilience of consumers despite these trying times, however.

Comparing 3 main themes in the health insurance search arena, affordability reigns supreme among consumers, not the low cost options. This demand has been constant from the time that Google started reporting on searches in 2004. What jumps out from this chart is the staggering rise of the action-oriented keyword “apply” in the health insurance space.

Consumers have had a constant demand for affordable health insurance, but over the past few years, they have been taking matters into their own hands to find the right ways to apply for health insurance. Affordability, the issue at hand for the Obama administration, will certainly be at the forefront of this debate. This search data, paired with the resilience of health insurer stock prices, indicates that the debate may not be a “helpless consumer.” Consumers are taking matters into their own hands to play off of the competitive nature of internet shopping to find their most affordable option.

The debate will likely continue in the coming months, with all sides bringing valid arguments to the table. Healthy argument tends to yield healthy compromise and that compromise will hopefully come with a look into addressing the following scenario:

  1. Rising operational expenses to health insurance providers causes compressed margins as expenses rise at a rate 2-3x the cost of inflation (CPI).
  2. UnitedHealth and WellPoint, among others, have a profitability obligation to shareholders which requires them to maintain their premiums at a trade-off between their rising opex and volume of customers.
  3. Consumers have increasingly turned to the internet to do comparison shopping, which naturally drives the price down to the market equilibrium of what providers can afford at an acceptable rate.

These market factors in play lead the current cost of health care to be at the market equilibrium price, based on revenue vs. cost. The only way to naturally drive the price (cost) of health care to consumers is to look into the reasons for the rising opex. Hospital costs rising over 80% in the past 10 years while other goods and services have raised a mere 29%; this begs the question:

Rather than focus on mandating a lower cost of health insurance, shouldn’t we attack the reasons why health insurance has become so expensive?

The public debate has not yet shifted to this arena, but it appears that the equity market may already be taking this into account. Stocks like UnitedHealthcare and WellPoint will be the reflection of where we move toward in health care reform. At this point, they appear to indicate that we will either stay status quo or move in the private direction.

Thursday, September 3, 2009

Google Finance Launches Economic Indicator Prediction Tool

Earlier today, Google (NASDAQ:GOOG) released a new tool on their Google Finance platform called Google Domestic Trends. The idea behind the platform is to use a bucket of queries to serve as a proxy for various economic indicators such as unemployment, air travel, credit & lending, etc.

It's reassuring to see that Google is moving toward this direction in moving toward sharing their data beyond its value to advertisers and the CDC to include your average, everyday investor.

It was also very interesting to see a (relatively) main stream take on the concept of using search data for investment recommendations in today's Tech Crunch. There is still a long way to go with using internet data strategies for retail investors; we are still just at the beginning of a new era.

Disclaimer: Author owns shares in GOOG.

Jobless Claims Prediction Hits the Mark

Earlier this week, following a Google Insights for Search snafu, Markets with Search predicted that jobless claims would come in flat for the week (in line with consensus). The numbers released today validated the claim. Chalk one up to another win for using search to "predict the present."

Looking further into the issue which resulted in the errant prediction earlier, it is to my understanding that Insights for Search data may take up to 2 days to finalize following the end of a periodic week. The initial prediction was made on data that has not been fully normalized. While this is not ideal, it still enables you to be ahead of data that is delayed by 5 days.

Wednesday, September 2, 2009

Console Wars: How PS3 Price Cut is Impacting Unit Sales

Two weeks ago, Sony (NYSE:SNE (ADR)) announced that they were cutting the price of their Playstation 3 console by $100 to a price of $299. It has been no secret that PS3 has been the laggard of the next generation consoles (Nintendo's Wii and Microsoft's Xbox 360), but investors will want to know whether this price cut will stimulate growth of Sony's effort.

Initial indications in the search space is that the price cut has in fact driven consumers to express interest in purchase of the PS3 console. Looking through call-to-action "buy" keywords, with a filter to remove searches for consumers seeking to buy "points" on these consoles, it appears that searches for interest in purchasing the Playstation console.

It does not appear that Microsoft (NASDAQ:MSFT) has had as much luck with their reaction to cut the price of their most expensive console, announced a week after Sony. Searches for Xbox purchases remained flat through last week.

These are still initial results and there is much left to be seen of where sales will sit once the dust settles, but the first response appears that Sony is winning this battle.

Disclaimer: Author owns shares in MSFT.

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