Are Publicly Traded, For-Profit Colleges Endangered?

Grand Canyon Education, one of the nation’s largest private for-profit schools, announced in October that it may transform into a tax-free, nonprofit business model.

The move would require the school’s buying out shareholders and removing itself from publicly traded markets.

Going nonprofit would lower the school’s taxes. A greater benefit might come in the school’s exit from what President and Chief Executive Officer Brian Mueller called, in a statement posted to the university’s website Oct. 29, the stigma surrounding the for-profit industry.

Grand Canyon Education's 7,000-seat GCU Arena in Phoenix. An October letter from the company's CEO said the stigma plaguing the industry, "some of...

Grand Canyon Education’s 7,000-seat GCU Arena in Phoenix. An October letter from the company’s CEO said the stigma plaguing the industry, “some of… View Enlarged Image

“Some of which is deserved, and some not,” the statement said, but “(it) is real and it is not improving.”

Neither is the tax situation. The head of the Christian-based school says that it’s just getting too hard to compete with state college and university systems that account for nearly three-fourths of all U.S. college students.

“State universities are heavily subsidized by the government and don’t pay taxes,” Mueller told IBD. “We don’t get subsidies. That puts us at a significant disadvantage.”

Grand Canyon operated under nonprofit status for more than five decades until 2004, when financial stress forced it to go public in search of investment capital. Now, Mueller expects Grand Canyon’s annual tax bill to hit $ 100 million within two years. It would top the company’s total 2013 net earnings of $ 88.7 million, based on $ 598 million revenue.

Grand Canyon (NASDAQ:LOPE) has a 100-acre campus in Phoenix and was a pioneer in online classes. Nearly all leading colleges have since aggressively developed online offerings. But Mueller is still banking on Grand Canyon’s “hybrid campus” model of on-campus and online classes — which, he said, “leverages our structure with favorable tuition rates and a strong and growing brand.”

Grand Canyon faces tough competition. Top state schools like Pennsylvania State University and University of California, Los Angeles have developed innovative online offerings. Private, non-profit schools, from Yale and Duke to respected smaller players like Pepperdine University — which are tax-free and typically enjoy healthy endowments — have also built competitive online programs.

For-profit private colleges like Grand Canyon, Apollo Education Group (NASDAQ:APOL) and DeVry Education Group (NYSE:DV) boomed while most of the stock market collapsed in 2007-09, as the collapse forced tens of thousands of U.S. workers to change occupations or upgrade their job skills. The schools group then collapsed amid declining student enrollment, increased federal scrutiny and rising competition.

Nonprofit education stocks regained some ground in 2013 as revenue and earnings recovered. Under pressure through most of 2014, the stocks turned up sharply as a group in mid-October after a note from Robert W. Baird upgraded Grand Canyon to outperform from neutral. Grand Canyon also led the group higher on Oct. 30, surging 8% after a strong Q3 earnings report.

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