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Stock Strategist

The Best Education (Stocks) Money Can Buy

Investing in these five firms could help pay for tuition someday.

Very few people question the value of a good education, and neither do we at Morningstar. A big part of our mission is educating investors so that they can make rewarding financial decisions that will help build wealth over the long run. We achieve this through a variety of offerings, including our Analyst Reports and our Investing Classroom on Morningstar.com.

In fact, we appreciate not only the value of education, but also the value in education. There are about 25 education companies in Morningstar's database of more than 7,000 stocks, and several of these have earned investors fantastic returns. For example,  Apollo Group  has returned more than 33% annually over the past decade, while the S&P 500 has gained just above 9%.  DeVry (DV) and  Washington Post Co (WPO)--which owns Kaplan--are two more education stocks that have bested the market in the preceding decade, while  Strayer Education (STRA)--which hasn't traded publicly for a full decade--has trounced the market in the time it's been public.

We think that the future looks pretty bright for these education companies, as well, and that there are at least two education stocks--  Educate  and Washington Post--that are worth buying today. Also, there are three education companies--Apollo, DeVry and Strayer--that we'd snap up quickly if their shares weakened a bit. Below, I've included some important data points on these five stocks and some analysis from Morningstar analysts.

 Five Great Education Firms Selling at a Discount
Company Revenue ($million) Market Cap ($million) Fair Value Estimate 5-Star
Price

Current Price

Apollo Group  2,152 12,356 $84 $64.80 $68
DeVry (DV) 790 1,550 28 $21.60 $21.97
Educate  332 435 $17 $13.10 $10.20
Strayer (STRA) 211 1,460 $117 $90.20 $101
Washington Post (WPO) 3,508 7,275 $1,000 $852.10 $758
Data as of 12-12-05.

Apollo Group
The University of Phoenix is Apollo Group's main offering for postsecondary education, with an online as well as an on-ground segment. Online growth has been particularly strong and has provided Apollo with piles of cash. Apollo's accreditation and access to government financial aid programs contribute to its wide moat. Apollo is different from many other publicly traded for-profit education companies. About 95% of its students are enrolled in bachelor's and master's degree programs. These degrees are often pricier to obtain and offer better economic prospects than diploma programs or associate's degrees.

DeVry
Education firms like DeVry have bright growth prospects. According to the National Center for Education, enrollment in postsecondary education is expected to increase 16% from 2002 to 2012, driven by an increase in the population of high school graduates and adults returning to school. A greater percentage of high school graduates, roughly 67% in 2003, are continuing with some form of postsecondary education, often juggling classes with full-time jobs. These trends bode well for DeVry, which offers flexible course schedules for working adults, online courses, convenient locations, and career-oriented programs in relatively growth-oriented areas of the economy.

Educate
Educate is currently trading at a huge discount to our fair value and we're pounding the table recommending that investors consider the shares. Educate owns the Sylvan Learning and Hooked on Phonics brands. The company operates about 200 learning centers in about 150 territories while its franchisees operate another 900 in 700 territories. Educate also provides tutoring services to institutions, including elementary and middle schools throughout the United States. We are generally optimistic about Educate's prospects. The company controls two of the best brands in K-12 education. While the learning center business is mature, the Hooked on Phonics brand has loads of potential. Educate seems to have a relatively good working relationship with its franchisees. Management has plenty of experience buying and integrating franchised operations, and there is adequate supply of franchisees to keep Educate growing for many years.

Strayer Education
Wide-moat firm Strayer Education enjoys high returns on invested capital, strong operating leverage, and robust free cash flow. For-profit education is very profitable, with wide-moat companies such as Apollo Group and Strayer generating returns on invested capital north of 90%. We think these outsized returns are sustainable because of the industry's high barriers to entry. Top-flight firms such as Strayer possess regional accreditation, which is difficult to obtain and contributes to their moats. Membership follows a period of candidacy lasting up to five years, and periodic reviews are required for continued accreditation.

Washington Post Co.
In our opinion, Washington Post management has developed an attractive growth engine in Kaplan. We think much of the opportunity lies in its higher education businesses, which accounts for almost half of Kaplan's revenue. A good portion of this growth should come from its Kaplan University online education offerings. Since 2002, Kaplan University has added 10 degree programs, which has spurred online enrollment to double each year since; as a result, Kaplan University's revenue has tripled over the same period. Given the increasing acceptance of online education, we expect that online education enrollment will continue to grow, and that Kaplan University's financial results will grow in tandem. Management is also expanding Kaplan's presence internationally. It now has almost 50,000 students enrolled in 29 locations outside the United States. We anticipate even more international growth.

Jonathan Schrader does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.