Business & Professional
Services
INITIATION
Initiating on Education: Lending Concerns
Justified for Some, Not Others
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Initiating coverage of the Postsecondary Education sector with a selective
stance. We have Outperform ratings on Capella and DeVry, which we see
as high-quality companies that have been overly penalized by investors’
student lending concerns. We have Neutral ratings on Apollo, which has
held up relatively well and seems fairly valued given our concerns about
waning operational momentum; Strayer, which we believe is well positioned,
but too expensive; and Career Education, Corinthian, ITT, and UTI, for which
we believe lending concerns are justified, but appropriately discounted.
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Lending woes interrupted rally. The education index is up 37% since November
2006, but it fell 29% since November 2007 on student lending concerns.
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Still expect nice growth. Growth rates have slowed from 2003-04’s
25%-plus levels, but we expect 9-12% 3-5 year sector earnings CAGR.
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Quality a much bigger differentiator now. We believe investors are now more
focused on educational quality following recent years’ regulatory problems and
pricing pressures. Key beneficiaries are Capella, DeVry, Strayer, and UTI.
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Fear lending woes may spill to prime loans and downside risks are
significant. Risks to subprime private student loans are well known. We
worry that woes may spread to prime loans. Due to lending-related risks, we
worry Corinthian (13% of revenue from private loans/10% subprime) and UTI
(10%/3%) could lose money in 2009 and Career Education (18%/3%) and
ITT (29%/5%E) could face 40% and 60% downside earnings risks in 2009,
respectively. However, we believe these risks are largely discounted. We
believe Apollo, DeVry, Strayer and Capella have small exposure.
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Concerns about federal lending program seem overblown. Sallie Mae’s
deteriorating student lending profits, coupled with recent incremental news
flow on ABS securitization woes, have sparked fears that federally funded
student aid (68% of sector revenue) will dry up for all players. Disruption in
the timing of loan disbursements or rising lending administration costs for
companies would likely be worst case scenarios—we doubt the U.S.
government would let its biggest aid pool dry up.
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Weak labor market may help 2008-09, but not for usual suspects. Lending
woes may prevent UTI, Corinthian, Career Education, and ITT, which offer
more countercyclical Diploma and Associate’s programs, from benefiting
much this time. Apollo may be best play on this theme now, followed by
Strayer, DeVry, and Capella.

Table of Contents
Investment Thesis Summary 3
Recent Context on Sector Fundamentals 14
Lending Situation 16
Sector Growth: A Detailed Look Back and Forward 28
Companies 52
Apollo Group Inc. (APOL) 53
Capella Education Company (CPLA) 68
Career Education Corp. (CECO) 82
Corinthian Colleges, Inc. (COCO) 98
DeVry Inc. (DV) 113
ITT Educational Services, Inc. (ESI) 129
Strayer Education, Inc. (STRA) 145
Universal Technical Institute (UTI) 160