Ira Sohn: Eisman Says For-Profit Ed The New Sub-Prime

Next up at the Ira Sohn Investment Research Conference is Steve Eisman, the senior portfolio manager of the FrontPoint Financial Services Fund, who says he thought he’d never see a scandal equal to sub-prime mortgages, but he’s found it: for-profit education companies, such as Apollo Group (APOL).

Eisman’s presentation is called “Subprime Goes to College.”

With for-profit ed reps literally trolling bus depots and casinos looking for the most desperate members of society that they can lure into the most expensive programs, for-profit ed is up-ending the traditional practice of students aiming for what they can afford.

“The government, students, and the tax layers bear all the risk while for-profit reaps all the profits,” states Weisman.

As of 2009, he notes, the industry has almost 10% of students but 25% of the aid disbursed.

How did all this happen? “They’ve hired every lobbyist in washington DC,” says Eisman.

And now, default rates are starting to soar.

“As long as the government continues to flood the industry with loan dollars, the industry has every incentive to continue to grow…these companies are marketing machines masquerading as universities.”

The key, as with sub-prime mortgages, was to get the accreditation bodies to give the schools the blessing of their rating, which some for-profits do with having executives sit on the boards of the accreditation bodies themselves.

What’s going to happen? Eisman sees a continuing crack-down on the industry by Washington, but also the eventual rise in gainful employment, which will start to chip away at for-profit ed’s amazing enrollment engine.

Eisman goes through scenarios for what could happen to Apollo et al. in a situation of rising employment. He sees declines for APOL and others in EPS annually of 40% or more.

Surprisingly, Eisman also goes after Washington Post (WPO), owner of the Kaplan test-prep business. In one scenario, WPO’s 2009 EPS of $9.78 could fall by as much as $33 per share — yes 440% — as total EBITDA for WPO is coming from Kaplan.