Investing in Education? (BBBB, PSO)
I think one of the most interesting things about investing is finding trends by keeping up on the news in a variety of areas, then thinking of ways to use those trends to make money in the market. One article about higher education in the Washington Post today -- Colleges, Awash in Applications, Turning Away Even Top Students -- brought the swelling ranks of college undergraduates to mind. As someone who works in academia, this is something I think about a fair amount from time to time.
Nearly everyone has ideas about how to invest to benefit from demographic trends, but the one that gets most attention is the graying population as the baby boomers reach retirement (think health care, recreational vehicles, sunbelt real estate, etc.). While I have many investments that hope to take advantage of that, I think a more interesting trend to address at the moment might be the explosive growth in higher education.
This growth is taking place in a few different ways -- the trend we hear a lot about is the boom in distance education, for-profit universities and adult education with people going back to school to give themselves an edge in the workplace. That's certainly a viable trend, and Corinthian Colleges, Apollo Group, Strayer, and many others have been very lucrative investments for many folks.
But traditional schools are also booming and seeing more and more students than ever before. These schools are becoming more selective as they see larger and larger incoming classes, as the Post article above covers in some detail.
Companies that might be effective investments to exploit this trend are the academic publishers and academic services companies. Among publishers, I've looked before at Reed Elsevier (RUK), which I think is probably a solid investment but it's a company that I don't personally like very much for non-investing reasons (I work at a university, and Elsevier is like a leech on our budget). Another British publisher that pays a better dividend and is more leveraged to textbooks both in primary and secondary education is Pearson (PSO). Pearson is just now recovering from some down years, has a very reasonable PE, and pays a nice 3.5% yield, definitely something I'll take a look at.
Among service companies, by far the most impressive one in my mind is Blackboard (BBBB), which I've mentioned before. BBBB is an interesting story -- they produce enterprise software which helps colleges handle the computing demands of managing the accounts and registration details for their burgeoning ranks of students and staff, but the more well-known software they serve is for course management. I've used this both as a teacher and student, and with the increasing size of college classes and the increasing numbers of classes that are taught online or as hybrid online and in-person experiences, demand for this kind of management software is climbing fairly dramatically.
The stock has been an irregular performer of late, and I think this might be a good opportunity to open a position while their earnings are entering a period that the company expects to be fairly poor. BBBB will be digesting their acquisition of WebCT, which was its best competitor, and that's going to significantly impact their reported earnings in 2006, to the extent that the company expects to report a loss for the year.
But the trend is definitely in their favor once this acquisition is fully incorporated -- they will have the lion's share of the market for course management software, and certainly the strongest selling position of any of their competitors (colleges like to go with strong suppliers that lots of other colleges are using, and they don't like change so renewal rates are around 90%). T
here is certainly competition from some other providers, some people fear Microsoft will make a big push in this area, and open source options are available -- but the entrenched leader, which Blackboard is at this point, has a great advantage in this market, even if they're fairly small in the grand scheme of things.
No one wants to be the one who has to tell 4,000 cranky faculty members that they have to learn an entirely new piece of software in order to teach next semester, and as colleges face massive IT challenges not only in hardware replacement and overall migration to Vista but also in handling their thousands of students who are swamping networks by downloading movies and feeding their MySpace and Facebook addictions, the last thing they want is an open source solution that requires significant contributions from IT people who they have a hard time hiring anyway. An out of the box solution like those offered by Blackboard is ideal for this environment.
Beyond the business they're in and the catbird seat they occupy as they watch the renewal money come in, I really like that the company is small (well under $1 billion), the founders are still running the show and are very aggressively trying to build the business, and management still own a large portion of the company (which often is a good sign that their interests are in line with ours). It has been a pretty volatile company in its almost two years of life on the public markets, but the price seems to have stabilized a bit now that their low guidance for this year has been digested, and folks are starting to think about how strong a future Blackboard will be once WebCT is fully on board and they have a stable platform from which to continue growing and adding services and products.
There are certainly other companies that might profit from the expanding ranks of college students -- American Campus Communities (ACC) is a student housing REIT that owns a lot of housing on and near college campuses that can absorb those bodies, but as a REIT it doesn't really stand out from the pack with an average performance and an average 5.5% yield. And I can't think of anything more nervewracking than being a landlord for college students, so I'm not sure I'd want to take on the potential liability headache of this sector for such a small yield.
So today, it's Pearson and Blackboard that are looking like my most likely purchases in the education realm. I'll let you know if I decide to actually make a purchase in either (or something else).
Nearly everyone has ideas about how to invest to benefit from demographic trends, but the one that gets most attention is the graying population as the baby boomers reach retirement (think health care, recreational vehicles, sunbelt real estate, etc.). While I have many investments that hope to take advantage of that, I think a more interesting trend to address at the moment might be the explosive growth in higher education.
This growth is taking place in a few different ways -- the trend we hear a lot about is the boom in distance education, for-profit universities and adult education with people going back to school to give themselves an edge in the workplace. That's certainly a viable trend, and Corinthian Colleges, Apollo Group, Strayer, and many others have been very lucrative investments for many folks.
But traditional schools are also booming and seeing more and more students than ever before. These schools are becoming more selective as they see larger and larger incoming classes, as the Post article above covers in some detail.
Companies that might be effective investments to exploit this trend are the academic publishers and academic services companies. Among publishers, I've looked before at Reed Elsevier (RUK), which I think is probably a solid investment but it's a company that I don't personally like very much for non-investing reasons (I work at a university, and Elsevier is like a leech on our budget). Another British publisher that pays a better dividend and is more leveraged to textbooks both in primary and secondary education is Pearson (PSO). Pearson is just now recovering from some down years, has a very reasonable PE, and pays a nice 3.5% yield, definitely something I'll take a look at.
Among service companies, by far the most impressive one in my mind is Blackboard (BBBB), which I've mentioned before. BBBB is an interesting story -- they produce enterprise software which helps colleges handle the computing demands of managing the accounts and registration details for their burgeoning ranks of students and staff, but the more well-known software they serve is for course management. I've used this both as a teacher and student, and with the increasing size of college classes and the increasing numbers of classes that are taught online or as hybrid online and in-person experiences, demand for this kind of management software is climbing fairly dramatically.
The stock has been an irregular performer of late, and I think this might be a good opportunity to open a position while their earnings are entering a period that the company expects to be fairly poor. BBBB will be digesting their acquisition of WebCT, which was its best competitor, and that's going to significantly impact their reported earnings in 2006, to the extent that the company expects to report a loss for the year.
But the trend is definitely in their favor once this acquisition is fully incorporated -- they will have the lion's share of the market for course management software, and certainly the strongest selling position of any of their competitors (colleges like to go with strong suppliers that lots of other colleges are using, and they don't like change so renewal rates are around 90%). T
here is certainly competition from some other providers, some people fear Microsoft will make a big push in this area, and open source options are available -- but the entrenched leader, which Blackboard is at this point, has a great advantage in this market, even if they're fairly small in the grand scheme of things.
No one wants to be the one who has to tell 4,000 cranky faculty members that they have to learn an entirely new piece of software in order to teach next semester, and as colleges face massive IT challenges not only in hardware replacement and overall migration to Vista but also in handling their thousands of students who are swamping networks by downloading movies and feeding their MySpace and Facebook addictions, the last thing they want is an open source solution that requires significant contributions from IT people who they have a hard time hiring anyway. An out of the box solution like those offered by Blackboard is ideal for this environment.
Beyond the business they're in and the catbird seat they occupy as they watch the renewal money come in, I really like that the company is small (well under $1 billion), the founders are still running the show and are very aggressively trying to build the business, and management still own a large portion of the company (which often is a good sign that their interests are in line with ours). It has been a pretty volatile company in its almost two years of life on the public markets, but the price seems to have stabilized a bit now that their low guidance for this year has been digested, and folks are starting to think about how strong a future Blackboard will be once WebCT is fully on board and they have a stable platform from which to continue growing and adding services and products.
There are certainly other companies that might profit from the expanding ranks of college students -- American Campus Communities (ACC) is a student housing REIT that owns a lot of housing on and near college campuses that can absorb those bodies, but as a REIT it doesn't really stand out from the pack with an average performance and an average 5.5% yield. And I can't think of anything more nervewracking than being a landlord for college students, so I'm not sure I'd want to take on the potential liability headache of this sector for such a small yield.
So today, it's Pearson and Blackboard that are looking like my most likely purchases in the education realm. I'll let you know if I decide to actually make a purchase in either (or something else).
This article posted by One Guy @ 4/07/2006 10:29:00 AM 0 comments
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