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Stock Strategist

Higher Education Equals Higher Moats

Favorable industry dynamics give Capella and Grand Canyon a wide moat.

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It is not easy for a company to receive a wide moat rating from Morningstar. Currently, only 169 of the approximately 2,000 companies we cover are assigned this rating, and we think very hard before upgrading a company to wide moat. We recently upgraded  Capella (CPLA) and are in the process of upgrading  Grand Canyon (LOPE), two for-profit education companies. The reasons behind these upgrades have to do with government-aided financing, low-cost business models, price-inelastic customers, and high demand for education.

We had recently seen an influx of new public entrants into this space with companies like Grand Canyon and Bridgepoint Education, a company that filed its initial S-1 in December. We wondered if the regulatory barriers to entry were less stringent than we had originally thought, potentially calling into question the wide-moat status of  Apollo (APOL),  DeVry (DV), and  Strayer (STRA). After some discussion, we came to the conclusion that the barriers to entry are weaker than we had thought. However, due to other reasons, we believe these companies still have a wide moat. On top of that, we believe that Capella and Grand Canyon deserve wide moats as well.

Todd Young does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.