K12 Inc. (LRN) is a for-profit education company that offers students an alternative to traditional schooling through online education. Since Trump’s victory and the Trump University settlement, for-profit education companies have been performing well on Wall Street. LRN is up 15% at the time of writing and it is worth taking a closer look (the company will also release its earnings on February 4th, 2016 as well – something to watch).
A little history here.
For-profit colleges prior to the Obama Administration’s shutdowns were a multi-billion dollar industry. The Administration has regulated these colleges in many ways. Most recently was the “gainful employment rule,” stating that colleges must track their graduates performance in the workforce. If graduates fall short in the field, colleges and programs will lose funding. When the rule was enacted in 2015, a total of 1,400 programs were forced to close. Commissions headed by Senator Elizabeth Warren and investigations by state attorneys closed many colleges including ITT Technical Institute and Corinthian Colleges. Now, it is looking like the sector itself could see a swing toward many leaders who do not have experience in education. Many Obama administration devotees will likely head for the door and many reports out of Washington show that the department is feeling low. Many people see their life’s work going up in flames, according to reports. Trump will likely bring in many newcomers and the current mission will probably be lost in new policies. Worst case scenario for the sector is a serious downsizing rather than an outright closing as some have feared. Yet, the reports, hirings and leanings look to be very good for for-profit schools to start earning again.
K12 is not a risk-free bet. The company lied about its student success rates, parent satisfaction, class size, graduates’ eligibility for the University of California and California State University, among other modes of data that was used in press releases and advertisements. The class action lawsuits stem from a San Jose Mercury News investigation from April 2016 that looked to expose K12 as a fraudulent moneymaking enterprise that fabricated a wide variety of claims. The investigation aimed to demonstrate how K12, a Virginia-based company, took advantage of California education law that have no specific rule about for-profit firms running charter schools in the state. Initially, K12 established online schools with individual, separate names so that the school and the corporation seemed unlinked for tax-exempt purposes because Federal Tax Laws prohibit charitable organizations from working to benefit a company. However, the report alleges that K12 employees started online schools posing as a “group of parents.” The company tried later to open a brick and mortar school in Contra Costa County, but was denied on the grounds that the Virginia administrative entity would be running day-today decision making. In addition, the report found that teachers lied about attendance to keep taxpayer dollars coming, very few online students earned diplomas, the company has reaped $312 million in profits over the last twelve years, schools that oversee the online academies get a cut of revenues and are inclined to turn the other way when they see inaccuracies, and many students test well-below state standards in reading and math.
All that being said, K12 is probably undervalued in a growing market. Online learning has increased 80% since 2010 and school districts across the country now widely implement blended learning courses. Digital learning is acceptable and becoming an alternative for many parents. Currently, there are only 18 states that do not allow full-time online learning. This will soon change.
K12 is well positioned for this change and has 40% of the marketshare. The company is financially flexible and many parents will choose K12 because of its variety of products. Not to mention, K12 has spent a lot of money establishing itself with technology, proper curricula and infrastructure. This why as more public school district seek blended learning, LRN will certainly be a player for their money. In addition, K12 also offers supplemental materials and this also boosts their bottom line.
Parents choose online education for a variety of reasons and in a digital age, it is unlikely that K12 will lose business over the next few years. If state governments see budget cuts or lose funding, it is possible that K12 could get the boot, but K12 offers many different ways to make a buck.
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