For-Profit Schools Look Abroad for Growth

As their student enrollments in the United States continue to shrink, some for-profit schools are hoping to find growth opportunities in other countries.

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“There is increasing interest in tapping into demand from abroad for post-secondary education,” says Citigroup analyst James Samford.

Domestic operations of the for-profit education firms have been hit hard by stricter government regulations and the weak economy, with the speed of recovery remaining uncertain.

An index of ten for-profit education companies, the S&P 1500 Education Services Index is down 19 percent in the last three months and 9 percent for the year, as of Friday morning.

“It makes sense to go overseas with everything going on in the U.S. market,” says Jeff Silber of BMO Capital Markets. “The overseas market is about 8 times larger, with the college participation rate well below the U.S. in many areas, so there are lots of opportunities.”

DeVry is one of the schools taking up the importance of international expansion.

“We see certain international markets, in particular Latin America and India, as important opportunities for growth,” DeVry’s spokesperson told CNBC.

According to the company, growth overseas helped it mitigate the declines in total enrollment last quarter.

The number of students at its DeVry Brasil operations increased 18 percent year-over-year and new enrollment was up 29 percent year-over-year. The company says it “continues to invest in new programs and new campus locations” in the country.

Apollo Group and Washington Post’s Kaplan, which have an established presence abroad, say they continue to aggressively pursue new growth opportunities. Kaplan made three international acquisitions in the second quarter, according to its recent earnings report.

Capella University this summer acquired an online education service provider in the United Kingdom. And ITT Educational also recently said that it is considering expanding internationally.

Overseas operations currently account for a relatively small percent of the overall revenue: 6.8 percent at Apollo Group, 12.3 percent at DeVry, and 26 percent at Kaplan.

But analysts say they expect international revenue to grow, while revenue from the U.S. business will likely shrink in the next two years.

“Organic growth internationally outpaces domestic growth, particularly in emerging markets,” says Samford. “And all for-profit education firms have strong balance sheets and cash to do acquisitions,” he adds.

Rising middle class, growing college participation rates, and a young population, particularly in Asia and Latin America, help drive the demand for post-secondary education abroad, says Trace Urdan, analyst at Wunderlich Securities.

In some developing countries, like Brazil, public universities are free but can admit only the most highly qualified students, leaving many on the sidelines. There are only 428 college graduates per 100,000 inhabitants in Brazil, according to 2009 UNESCO data.

But expanding abroad is not easy, says Silber.

“While there may be less regulatory issues, there are few countries that have the financing mechanism in place like Title IV [federally funded student aid programs like federal grants, loans and work-study programs] in the U.S.,” Silber told CNBC.

"Asia is the biggest opportunity," adds Silber. “But it is tough to penetrate. U.S companies need to find local players that know the market.”

In India, for example, government aims to triple the enrollment in higher education by 2020 from present 16 million to 40 million. But the country’s human resources development minister said at a recent U.S.-India Summit that for-profit companies are not welcome in his country.

For-profit education firms are keeping details of their expansion plans close to the chest and say their commitment to the U.S. market remains strong.

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