Companies involved in education and training services can become good investments. At a number of times in an average person's life, they are in school or receiving training for their career.
In the case of early learning especially, children need supervision and learning while one or both parents work full-time. Every neighbourhood has one or several early learning centres to cater to this need.
The opportunities are great for a company to branch out across the states through acquisition. Just like a chain store or restaurant, the growth phase can be highly lucrative if the company can successfully transplant and reproduce its business in new areas.
Here are three stocks that investors can own and benefit from the growth potential.
The Australian Education Trust (ASX: AEU) invests in early learning properties in Australia and New Zealand. It may not be expanding as quickly as other early learning service companies, yet it is a long-term proposition similar to other real estate investment trusts (REIT). Earnings are from leasing and the sale of properties.
Property asset values will also rise over time. REITs can also be valued according to their net tangible asset (NTA) value per share. As of 31 December 2013, the company's NTA per share was $1.40 and its current share price is $1.67, so the market is paying a premium on its value.
Profits have increased greatly over the past three years and the stock's dividend yield is 6.3%.
The biggest education service provider listed on the ASX is Navitas Limited (ASX: NVT). Its share price has climbed about 44% in the last 12 months. It has increased revenue and underlying net profit every year since 2005.
It offers educational programs from vocational training and English language proficiency to Bachelors and Masters degrees through its colleges and arrangements with established universities. Its dividend yield is 2.6%.
One early learning centre operator that is grabbing a lot of attention from the stock market is G8 Education Ltd (ASX: GEM). At the beginning of the year it announced it was acquiring 63 early learning centres, bringing its total to 296. Then, just several days ago it released another announcement stating it would be buying up 91 more childcare and education centres for about $228 million.
In the past two years its share price has gone from about $0.88 to its current $4.95. The childcare and early learning industry is highly fragmented with most early learning centres owned by single, private operators.
Foolish takeaway
Education can be expensive for consumers, but the profitability of these companies with growing business models is evident as well. You should monitor the prices and earnings multiples that a company pays for its acquisitions. Growth for growth's sake can lead to inflated purchases and lower returns.
Investors will have a better understanding of how the business is performing if they can see how like-for-like revenue increases separate from revenue of new acquisitions. In an expansion phase, additional earnings can drive share prices strongly.
