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.

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