2 top quality education stocks to add to your watchlist

3P Learning Ltd (ASX:3PL) and Kip McGrath Education Centres Limited (ASX:KIP) could positively surprise investors this year

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You might be wondering why, in the wake of the Vocation Limited (ASX: VET) disaster of the past year, I'd even be considering going anywhere near education stocks.

But there's a perfectly valid reason why.

You see, not every educational company follows Vocation's model or even caters to the same sector of pre-university type courses. The two I'm suggesting you keep an eye on focus almost exclusively on kids and school-level education.

3P Learning Ltd (ASX: 3PL) has a market cap of $324 million, but appears to be flying under the radar, with shares trading below the IPO price of $2.50, at $2.43 currently. There's a likely reason for that though. Shares were overpriced in the IPO, sporting a P/E ratio for the 2015 financial year of a whopping 34.7x and a tiny dividend yield of 0.7%.

The online education company offers cloud-based software-as-a-service (SaaS) products for schools and students in grades K-12, including the well-known brands Mathletics, Reading Eggs, Spellodrome and IntoScience. Students and schools in 202 countries and territories now use 3P's products and is growing rapidly, thanks to the migration from printed textbooks to online.

In the latest half, 3P saw revenues rise 21% to $18.4 million and pro forma net profit after tax jump 29% to $4.1 million. With strong growth in the online education sector predicted, even system growth should see 3P benefit.

Kip McGrath Education Centres Limited (ASX: KIP) provides after school tuition in 520 centres in more than 15 countries around the world, mainly in reading, spelling, English and maths to students who may be struggling with their school work or who just want to do better. A tiny company compared to 3P, Kip McGrath boasts a market cap of around $20 million, and a P/E ratio of 20x.

In the last half, Kip McGrath paid a dividend for the first time in five years, after producing a record first half profit of $474,000 as revenues surged by 31% to $7.5 million. Impressively, most franchisee sales are skewed to the second half, suggesting the company could produce a very strong result when it reports in August.

Whilst neither company looks cheap, Foolish investors might want to add these two to their watchlists.

Motley Fool contributor Mike King owns shares of Kip McGrath Education Centres Ltd. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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