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Online learning heats up


When Chris Budzynski began following education stocks for Legg Mason Wood Walker in March, he was looking beyond traditional education companies.

E-learning - the broad term for education companies using online outlets for training - was evolving into a hotbed of opportunity for investors. It also posed serious risks: Some education companies had followed the popular dot-com route of going public before posting profits and were foundering. Other, more established companies, were struggling to find their online footing. And some of the most promising ones were still private.

Budzynski, who had joined Legg Mason in 1994 and covered utilities before being tapped for the education job in March, took his time studying the rapidly changing sector.

Although it suspended coverage of several education companies when analyst Scott Soffen left in November, Legg Mason has always been interested in the $715 billion education industry. During his tenure, Soffen recommended traditional companies such as Sylvan Learning Systems Inc., Strayer Education Inc. and DeVry Inc.

"There was a hole on the research side," said Budzynski, now vice president of education services and technology. He hopes to fill the hole with a host of players from the e-learning market, which he estimates will grow to $54.2 billion by 2005 from $6.7 billion this year.

Budzynski announced this week that his initial picks are DigitalThink Inc., based in San Francisco; Skillsoft Corp., based in New Hampshire; and SmartForce PLC, based in Dublin, Ireland, with U.S. headquarters in Redwood City, Calif.

The Legg Mason analyst rates DigitalThink and SmartForce "buys," and Skillsoft a "strong buy."

"They are all basically involved in online training," Budzynski said of the three companies.

Although none of the companies is local, Budzynski said that shouldn't soften the buzz about e-learning opportunities here. Talk of Baltimore as an heir-apparent to the title of Silicon Valley for Internet education companies intensified when Sylvan Learning Systems announced that its incubator arm, Sylvan Ventures, would remain here.

Budzynski is following Sylvan's developments, and is in discussions with the company about initiating coverage. He said he also plans to talk with executives of Sylvan spin-off Caliber Learning Network about covering that company.

Budzynski hesitates to identify other potential recommendations. He said he'll look at both traditional companies and those focusing on K-12 education as he spends more time in the job.

"At the present time, there are a limited number of publicly traded pure e-learning companies in the K-12 and higher education markets. ... We believe several of these companies do not possess strong business models and may have gone public prematurely. However, we remain extremely excited about the prospects for several private companies operating in these markets," Budzynski wrote in his report.

Fred McCrea, a research analyst for Thomas Weisel Partners in San Francisco, said Budzynski's first picks rank among the sector's premiere companies. "These models are all great; they're all generating revenue," he said.

McCrea remembers the early days of e-learning, when Thomas Weisel was one of the few firms watching such stocks. Today, the list of brokerage houses covering Ireland's SmartForce alone includes heavyweights Merrill Lynch & Co. Inc., Goldman Sachs & Co., and Deutsche Bank. McCrea said he's glad another large firm has joined their ranks.

"It certainly validates the e-learning space," he said.

Trace Urdan, who follows the e-learning sector for WR Hambrecht + Co., also endorses Budzynski's three initial picks. Urdan has strong buys on both SmartForce and DigitalThink, and calls SkillSoft "promising," though he doesn't cover it. Urdan said he thinks Legg Mason is positioning itself to be an underwriter down the road when more of the many promising private companies will be ready to go public.

"You'll see a lot of underwriting in the first quarter of next year," Urdan said. "And [Legg Mason] obviously wants to participate in that."

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