Budget & Finance

Brokers Pitch Education as Hot Investment

By Mark Walsh — February 21, 1996 5 min read
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Wall Street is discovering the business of education.

Lehman Brothers, the venerable investment house, held what it described as its first annual education-industry conference here last week to introduce investment clients to promising companies that focus on education.

“Investment opportunities start as a solution to a problem,” said Michael T. Moe, a first vice president of Lehman and the firm’s lead analyst on education-related companies. “There’s no question that in education today there is a problem.”

The two-day conference brought some of the hottest companies in school management, software, child care, postsecondary education, and corporate training face to face with investment bankers and fund managers looking for opportunities to profit from what Lehman Brothers and others describe as a $619 billion education market in the United States.

“The education industry may replace health care in 1996 as the focus industry,” states a Lehman Brothers report released at the conference.

New Terms

The analogy to the health-care industry has been a common theme among observers looking at the rise of school-management companies such as Education Alternatives Inc. and the Edison Project. Many suggest that public education today is in the same condition the health-care field was 20 or 25 years ago.

Until the 1970s, the argument goes, health care was an inefficient industry dominated by government and nonprofit institutions. Things changed with the rise of private, for-profit health-maintenance organizations and later of for-profit hospital concerns. “Today, some of the largest for-profit companies in the world are in health-care products and services,” says the Lehman Brothers report.

The emergence of education as an industry worth watching has spawned its own terminology, and the investors and analysts here peppered their conversations with buzzwords like “specialty service providers” and “EMOs”.

Specialty service providers focus on small niches of instruction such as disciplinary problems. EMOs are “education management organizations"--companies like the Edison Project and EAI that want to run schools or districts.

“I think we will think of education increasingly in consumer terms in our society,” said John M. McLaughlin, the editor of The Education Industry Report, a St. Cloud, Minn.-based newsletter.

The newsletter publishes a stock index of publicly traded companies involved primarily in education. (See chart, this page.) The value of these stocks grew more than 65 percent in 1995, outpacing the composite membership of the over-the-counter NASDAQ stock market by more than 25 percentage points.

The newsletter’s current issue argues that the education industry is “coming of age.” It notes that there have always been companies that sold textbooks and supplies, but says the emergence of school-management ventures has refocused the industry.

The Lehman Brothers conference gave investors a close-up look at a wide mix of companies. But except for several software publishers, companies that primarily offer school supplies and textbooks were absent.

Retail Analogy

There is little doubt that education-management concerns are at the cutting edge of this emerging industry. Many participants in the conference were eager to hear about efforts by EAI, Edison, and Alternative Public Schools Inc. of Nashville, Tenn., to run schools under contract with local districts.

Of those three, only Minneapolis-based EAI is a publicly traded company. EAI officials used the conference to announce that they had learned important lessons from their recently canceled efforts in Baltimore and Hartford and that the company was ready to move on. (See story, page 14.)

Christopher Whittle, the media entrepreneur who founded the privately held Edison Project, based in New York City, urged investors to think of Edison as an education version of Home Depot, McDonald’s, or Wal-Mart--companies that have become leaders in their industries through innovation. “We hope you think of us in that group,” Mr. Whittle said.

Edison operates four public schools this year and hopes to operate as many as 10 by next year.

John C. Eason, the founder and president of Alternative Public Schools, used a similar analogy, citing Wal-Mart discount stores and Kinko’s photocopying centers as models for school-management companies to embrace.

APS manages an elementary school for the Wilkinsburg, Pa., school district, where it has encountered opposition from the local affiliate of the National Education Association. Mr. Eason said his company expects to add a contract to run a charter school in Chelmsford, Mass., in 1997.

The company expects to grow slowly, he said. “If we had 10 well-run schools in three years, we would be very excited about that.”

Among the other companies making presentations were: KinderCare Learning Centers Inc., a major child-care chain; Nobel Education Dynamics Inc., a growing operator of private, for-profit K-12 schools; Princeton Review Inc. and Kaplan Educational Centers Inc., the two major competitors in college-test-preparation centers and products; and TRO Learning Inc., a provider of remedial education software.

Sylvan Praised

One publicly traded company that impressed many investors here was Sylvan Learning Systems Inc., the owner of more than 500 private remediation centers around the country. The company has recently begun a push into the public schools by providing remedial services to students under the federal Title I program. (See Education Week, Nov. 29, 1995.)

Lehman Brothers last fall issued a highly favorable report on the company, recommending it as a stock buy.

Douglas L. Becker, Sylvan’s president, told the conference that the company has launched a $100 million advertising campaign to boost its name recognition. “There really hasn’t been the emergence of a single well-known brand name in education,” he said.

Several investment bankers or fund managers interviewed at the conference did not want to be quoted by name. One remarked wryly that what he sees as the sad state of education in the United States all but guarantees financial opportunities for the companies in the field.

Another investor noted that he was wary of school-management companies because of the political volatility of contracting with public school districts, as shown by EAI’s recent troubles.

“I would prefer,” he said, “to invest in companies that own their own facilities.”

A version of this article appeared in the February 21, 1996 edition of Education Week as Brokers Pitch Education as Hot Investment

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