Osterweis on For-Profit Ed

Dan Culloton: Another company, which may not fit in everyone's definition of "quality" is Apollo Group, the for-profit education firm--an industry that's come under a lot more government scrutiny and actually been criticized or predicted as being the next subprime by some market observers.

What's your thesis for Apollo Group and how do you get comfortable with that as a quality company?

John Osterweis: Well, Apollo by certain measures is a quality company. It generates a lot of free cash flow. It's not leveraged. It appears to be a key dominant player in an industry where there is great need.

The issue surrounding Apollo and the whole for-profit education industry is a perception that there have been high default rates on student loans, a perception that there have been abuses in recruiting students, a perception that many of the schools don't prepare students adequately for jobs, and the students were then saddled with debt from a program that is of no use to them.

Clearly, the government is clamping down on the industry and imposing much higher standards. Our view is that Apollo, which has about 400,000 students, is taking major steps to clean up any abuses on their end. In terms of recruitment, they have instituted a program of three-week free trial. So a student is recruited, goes to class for three weeks. At the end of that period, if the student decides this is not for him or her, they can drop out, and they owe no money.

So one of the issues with defaults is that students who don't complete the program have a much higher default rate than students who do complete the program, and so to the extent that you can get higher graduation rates by increasing standards at the intake level, default rates can be brought down.

And we think there is a need for training and education in this country, and we don't think the government wants to put the for-profit industry out of business. So it's really a question of regulating, improving standards, improving performance, rather than shutting an industry down. And we think that Apollo is among its peers a high-quality company that can take steps to mitigate any problems that have arisen.