National Education Corp.'s selection to the prestigious Standard & Poor’s 500 index last Wednesday immediately sparked a surge of interest in the Irvine company’s stock.
Some 660,000 National Education shares were traded Thursday, compared to 51,000 shares the day before, as portfolio managers added the training and vocational education firm to their holdings. Shares gained 88 cents Thursday to close at $25.63. The stock closed Friday at $25.50.
Analysts said the initial buzz of interest will fade, but the effect of being included on the list will continue to be positive.
“This might mean overdue recognition for the training-services sector, which has had its share of controversy,” said Jeff Kessler, a services industry analyst at the New York brokerage firm of Shearson Lehman Hutton.
Vocational education firms have been dogged by controversy surrounding loans made to students attending schools that were poorly run or that made inflated promises of the money that graduates could expect to earn.
“National Education is one of the most respected in the business, but it is hurt by the not-so-goods,” Kessler said.
Tim Patterson, a Standard & Poor’s analyst, said that National Education is the only training and vocational education firm on S&P;'s index.
Patterson said S&P; bases its selections largely on a company’s market value, and it seeks firms that provide broad, representational diversity among the 5,000 issues followed by the research firm. The 500 stocks represent $1.95 trillion of the $3 trillion in market value for all 5,000 stocks.
National Education replaced Church’s Fried Chicken on the closely watched index. Church’s is being acquired by a privately owned firm.
Last year, there were 26 changes in the list, including the addition of Security Pacific Corp. in Los Angeles. No Orange County firms were added last year.
Stocks in the index are weighted by their total market value, with IBM given the most weight. With a ranking of 442 out of 500, National Education won’t suddenly become a bellwether for the stock market.
But it will be a member of an index that many professional investors study more closely than the Dow Jones Industrial Average of 30 stocks. Most stock-index options and stock-index futures are based on the performance of the S&P; 500. Because of this, institutional portfolio managers own shares in each of the stocks to hedge the risk of their index positions.
National Education Chairman H. David Bright described the selection by S&P; as a “great benefit for our many stockholders.” But analysts said that National Education stock is not likely to soar in value because of the selection.
As the largest vocational education and training services firm in the country, “it’s already a closely watched firm on Wall Street,” said Arthur Rade, an analyst at Merrill Lynch Research in New York.
National Education’s stock price has increased steadily from a low of $12.38 in 1986 as the firm’s revenues and profits have climbed. Rade and Kessler expect the company to earn $52.2 million in 1989, compared with net earnings of $46.1 million reported for 1988.
The analysts lowered their 1989 earnings estimates by $2.5 million earlier this year after reports of a slight decrease in the number of students enrolled in vocational education schools nationally. National Education has done better than the national average, but enrollment has been flat in its vocational education programs for the first part of 1989, according to Barbara Milla, a spokeswoman for the company.
With low levels of unemployment and plenty of jobs available, there are fewer incentives for young people to return to school for vocational training.
“That’s the one negative for the company. It’s going to be a little tougher to get the enrollments. And marketing costs are going to increase as a result,” Rade said.
A poorer performance in vocational education, Rade suggested, should be offset by gains in National Education’s primary business of industrial training. Vocational education and the company’s publications represented about one-third of National Education’s total revenue of $457.5 million last year.
Rade attributed much of the company’s success in 1988 to the $250-million acquisition of Advanced Systems, a Naperville, Ill., training company. When the acquisition was announced in 1987, analysts said its advisability was unknown.
“But it clearly has merged into the company as a profitable operation,” Rade said.