A William Blair analyst lowered his rating on three higher-education providers, saying investors won't likely see any big increases in their share prices.
In a note to investors Wednesday, analyst Brandon Dobell said ITT Educational Services' tuition costs could "act as a lightning rod" for politicians or regulators, while limiting the school's ability to raise tuition prices. Meanwhile, default rates on student loans are high and an internal financing program for students is weighing on free cash flow, he said.
ITT's enrollment growth may also slow, Dobell said. He cut ITT to "Market Perform" from "Outperform."
The sector faces regulatory scrutiny from the Department of Education, Congress and the Securities and Exchange Commission. A government report found that loan default rates at for-profit schools were higher than at traditional schools, triggering Congressional hearings. The SEC also has an "informal inquiry" into Apollo Group Inc.'s revenue recognition practices.
Dobell also downgraded DeVry Inc. and Strayer Education Inc. to "Market Perform," saying the high-quality companies have expensive shares relative to the rest of the group. Even if regulatory issues are resolved, he said, he doesn't expect shares of DeVry or Strayer to gain much.
Despite the downgrades, Strayer shares rose 46 cents to $193.50, while DeVry shares rose a penny to $53.56 and ITT Educational Services rose 39 cents to $93.60.