If President Clinton has his way, there will soon be more standardized tests in classrooms across the nation. That is one reason that the computerized-testing business is on the rise.
By some measures, in fact, it is booming. On Sept. 26, Advantage Learnying Systems, a company in Wisconsin Rapids, Wis., that specializes in computerized reading and math assessment programs for elementary and high school students, took its stock public in a $45 million offering.
“It’s an IPO fueled by a trend that’s getting national exposure,” said Irv DeGraw, an independent initial-offering researcher in Sarasota, Fla. Despite its small size–its 1996 sales were just $22.4 million–and inexperienced managers, Advantage Learning Systems “is at the right place at the right time,” he said.
The stock offering is a first among companies that focus solely on computerized assessments in schools. But that fact, and Clinton’s spotlight on testing, are not the only reasons for all the attention on Advantage Learning Systems.
“It fits into the concern that so many school districts are falling behind in reading comprehension and math,” said Linda Killian, a principal at Renaissance Capital in Greenwich, Conn.
Indeed, only about 60 percent of American students meet or exceed basic reading standards in the fourth grade, according to the National Assessment of Educational Progress, a federally sponsored program. Yet virtually all fourth graders in many other developed countries, like Germany and the Scandinavian nations, satisfy this standard.
Such disparities have paved the way for “academic assessments” or “outcome standards,” experts say.
“We don’t have enough money for all the education we need in this country, so we’re trying to get more bang for the buck by measuring outcome and accountability–something corporations have done since the ’70s,” said Anthony P. Carnevale, vice president for public leadership at the Educational Testing Service, the huge non-profit testing group in Princeton, N.J.
And as academic testing grows, it is more likely to be computerized testing, now estimated to be a $750 million business, or just 0.1 percent of the $600 billion education sector.
“By using computers for testing, you can assess quality easier,” Carnevale said. “Students can go at their own pace and tests can be customized.”
Some big companies like Houghton Mifflin, McGraw-Hill and Harcourt General are expanding their computerized-testing activities. Harcourt General, for example, bought the National Education Corp. last spring for about $800 million; analysts say NEC’s computer-training business is a good fit with Harcourt’s textbook operation.
But testing is so small a part of the overall business of these giants that it is unlikely to affect their stocks’ performance. A purer play–and the dominant company in computerized academic testing–is Sylvan Learning Systems, which is based in Baltimore and has 1,200 test centers in 80 countries, making it the largest computerized testing service in the world.
Sylvan provides testing for architects, stockbrokers and others professional, and it runs tutorial centers and learning programs for professionals and students.
But Sylvan’s greatest strength is its exclusive agreement with the Educational Testing Service, which administers 9 million tests every year, to supply and give the computerized versions of the examinations through 2003. So far, two popular ETS tests–the Graduate Record Examinations, for admission to graduate school, and the General Management Admission Test, for business school–are given on computers.
Although no schedule has been set, the ETS is planning to computerize its other tests, too. And Sylvan is already on the case, developing a prototype computerized version of the Scholastic Assessment Test, the college entrance exam, for example.
But Sylvan lost to Harcourt General last spring in the race to acquire the NEC; the loss sent its stock temporarily reeling, to $25. And ACT Inc., a non-profit competitor of ETS, has sued Sylvan, contending that some of Sylvan’s activities with ETS violated antitrust laws. Sylvan has denied the allegations. (ETS is not a defendant in that case but it has drawn fire for its moves into the for-profit world and for its handling of some incidents of cheating on tests.)
Sylvan stock is no bargain, either, now trading at a dizzying 55 times earnings, compared to an average of about 24.5 for all education service and publishing companies. The stock closed at midweek at $42.50 a share, up about 58 percent so far this year.
But some analysts still see a good buy. “Sure there’s a high price-earnings ratio on the stock, but Sylvan has all sorts of extraordinary growth opportunities in front of them,” said Susan Robbins, an analyst at Baron Capital Management in New York, which holds Sylvan shares.
Less pricey is the stock of National Computer Systems, based in Eden Prairie, Minn. National Computer focuses on professional testing and training in information technology, but it is beginning to make more computerized academic-assessment products.
As it enters school testing, National Computer has two strengths. Its computer expertise–it specializes in training software and data management–gives it a head start in computerized assessments. The company is also the nation’s largest processor of standardized paper-and-pencil tests, such as the Iowa Test of Basic Skills. It already works with 23 states to design, print and score such tests.
These advantages, along with the streamlining initiatives of Russell Gullotti, National Computer’s chief executive, may be why its stock has risen from the high teens early last year to $37.50 at midweek. Even so, it trades at just 36 times earnings per share.
Despite the climbing stock prices and presidential support, this industry has great risks. One is based on a simple fact: Computerized tests require computers.
“The reality is that most schools in the United States are still operating without computers and probably will be for the next five years,” said Peter Appert, an analyst at BT Alex, Brown in San Francisco. Even after computerization, paying for computerized-testing products may be difficult for many public schools. A teacher, for example, may like the Accelerated Reader product from Advantage Learning Systems; it encourages students to read books independently, gauges their comprehension and can generate 20-odd assessments of a student’s reading skills.
But a starter kit costs $399, not to mention the cost of any of the featured books that the school library does not have.
True, these problems do not apply if the tests are mandatory and are given in computer centers. That is why Sylvan’s lock on the GRE and GMAT business is so envied.
Another risk is that the large companies now flocking to the market may bruise the smaller ones. Harcourt General had $3.3 billion in sales in its last fiscal year, 10 times National Computer’s revenues and 150 times those of Advantage Learning.
But some say the entry of the giants may mean fat acquisition profits for wise investors. For example, “I wouldn’t be surprised if ALS is taken over by Harcourt or another textbook publishing company,” DeGraw said.
