Education Stocks Sag As Markets Stay in Bearish Mode

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To critics who decry the for-profit education industry, shareholders in publicly traded companies that make up the sector can raise this defense: We're not exactly getting rich from our investments.

Business Page A look at the stocks of a selection of K-12 education companies shows that most have performed poorly this year. Some, such as the school management company Edison Schools Inc., have been downright abysmal, while a handful had racked up modest year-to-date gains in their share prices through late last month. (See table.)

Of course, the major stock market indices have also been on a downslide for most of the year and had an especially rough summer before beginning to rebound in recent weeks. The summer was also marked by the first new public offering of stock by an education company in many months, and by a private buyout of one K-12 school manager that will take it out of the public markets.

The group of 12 stocks examined by Education Week, which includes school managers, educational software suppliers, tutoring and test-preparation providers, publishers, and others, was down 14.6 percent from the beginning of the year through Aug. 23. The Dow Jones industrial average was down 11.5 percent in that period, while the Standard and Poor's 500 index was down 18 percent. The composite of the Nasdaq stock market, where 11 of the 12 stocks on the list trade, was down 29.2 percent in the same period.

"K-12 stocks have had an awful year, in part driven by the general market and in part by some company-specific issues," said Howard M. Block, an analyst who follows education companies for Banc of America Securities in San Francisco.

Stocks Left Behind

ThinkEquity Partners, an investment company based in Minneapolis, publishes a weekly newsletter tracking several sectors of education stocks. Its K-12 index, which includes a broader roster of companies than the dozen mentioned above, is down 39 percent for the year.

"At the beginning of the year, there was a sense that the Bush education bill was going to carry the whole group to bigger and better things," said Trace Urdan, a ThinkEquity analyst, referring to the "No Child Left Behind" Act of 2001. "The companies, by and large, have not lived up to expectations."

The only investment bright spot in education is in the postsecondary sector. For-profit higher education companies such as Corinthian Colleges, Strayer Education, and Apollo Group, which operates the University of Phoenix campuses, have seen significant gains in their stock prices. The sector has posted gains of about 15 percent this year, according to ThinkEquity Partners.

One K-12 company has decided it would be better off getting out of the public stock market. Nobel Learning Communities Inc., a West Chester, Pa.- based manager of 176 private schools and charter schools, announced last month a management-led buyout that would take the company private.

Nobel said on Aug. 6 that senior managers of the company would team up with two investment firms, Gryphon Partners II LP and Cadigan Investment Partners, to pay $7.75 a share for Nobel in a deal worth $110 million. That price was 32 percent above Nobel's Aug. 5 closing price of $5.85 a share.

'None of the Advantages'

The company will continue to operate under its current name and structure, officials said. Most of Nobel's schools are private, tuition- charging institutions in suburban areas, operating under such names as Chesterbrook Academy, Merryhill School, and Evergreen Academy. ("One School at a Time, Pa. Company Is Dominating the For-Profit Market," May 20, 1998.)

A.J. "Jack" Clegg, the chairman and chief executive officer, said the main reason behind taking Nobel private was that "the market has just not reacted to the company, to its earnings, or to its position in the marketplace."

"We had all the disadvantages of being public, yet none of the advantages," he added. Nobel spent about $500,000 a year to comply with federal reporting requirements and other demands on public companies, but did not have easier access to capital because of the company's relatively low valuation by the market, he said.

Adam Newman, the research director at Eduventures Inc., a Boston research firm that specializes in the education industry, said Nobel's decision to go private was probably the right move.

"At the end of the day, there was not a lot of [trading] volume around this stock," he said. "This recapitalization will give them some new momentum."

New Offering

Meanwhile, in late July, the educational toy company LeapFrog Enterprises Inc. had what was viewed as a successful initial public offering of stock amid a rocky market. The Emeryville, Calif.-based company is best known for its popular LeapPad, an interactive learning device that can be updated with new content in reading, math, and other subjects.

The 7-year-old company is part of the Knowledge Universe stable of education concerns owned by the financier Michael R. Milken, his brother, Lowell J. Milken, and Lawrence J. Ellison, the chief executive of Oracle Corp. Even after raising some $117 million by offering 75 percent of the company at $13 a share, Knowledge Universe retains voting control of the company.

The company earns most of its revenues from sales to consumers at toy stores and other retail outlets, with sales of $313 million last year. In 1998, it formed the LeapFrog Schoolhouse division to sell products to schools.

"We want to be perceived as an education company," said Robert Lally, the division president. "A lot of toy companies are driven by movie-character licensing or by fads such as Furby dolls. Our product line teaches such fundamental skills that they are more of an evergreen."

Shares of LeapFrog jumped to a close of $15.85 in their first day of trading on the New York Stock Exchange on July 25 and were trading at more than $17 late last month.

Funding for the Business page was provided in part by the Ford Foundation.

Vol. 22, Issue 1, Page 8

Published in Print: September 4, 2002, as Education Stocks Sag As Markets Stay in Bearish Mode
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