Earnings Disappointment a Good Entry Point for Apollo Group?

The question of bad debt expense for all these guys is now introduced.

- Ariel Sokol, Analyst, Wedbush Morgan

Apollo Group (APOL), owner of The University of Phoenix, is getting clobbered today after reporting fiscal year 2nd quarter earnings after the close yesterday. The quarter was phenomenal with enrollments up 20% year over year and revenues 26%. Their business continues to steamroll as rising unemployment and economic dislocation are causing many to go back to school.

But apparently analysts focused in on the rise in bad debt expense which rose to $36 million in the quarter from $26 million a year ago. This is a miniscule 4% of Apollo’s $876 million in revenue for the quarter. Further, they only have $167 million in student accounts receivable for owed tuition on the books, so this is pretty much a non-issue in my opinion.

Shares are off $13 (16%) on big volume.

I think this creates a good entry for Apollo shares. Their business should continue to be strong as people go back to school to obtain credentials for new lines of work.

Valuation is also now starting to become attractive. They have $909 million ($5.60 a share) in cash and marketable securities on their balance sheet. Back that out and you have a 15-16 forward multiple on analysts earnings estimates for their fiscal year ending in August. This for the leading private education company with a great operation and a whistle clean balance sheet.

Technically, today’s selloff has the marks of a capitulation selloff - or at least the beginnings of one. The stock should also find some support at its 200 DMA around $68.

I initiated a starter position in Apollo shares today.

Disclosure: Top Gun is long share of Apollo Group

Comments

[User 295337:]

looking at the other side of that trade - even after the drop, they have a price/sales ratio of over 3, and a double digit price/book (10+). despite that this is an educational institution and that these are hard economic times, it may still be hard to justify a P/E of 15-20 taking into consideration that this is relatively expensive form of education....

Apr 02 01:25 PM

[David Tsao:]

You need to pay attention to the quality of the students for these for-profit programs. I'm not saying that University of Phoenix students are of bad quality, but making a reference to the majority of students are coming from. Are they coming from high school, which I would categorize as representing larger risk for defaulting on payment (higher allowance for doubtful accounts), or from employer sponsored tuition or transfers out of 2-year diploma programs (stronger credit and financial backing).

Method of payment also make a huge difference whether the school demands payment up front (like Strayer). I honestly don't know the payment details for Apollo's programs, nor do I have student demographics off the top of my head, but it's best to dig into that before diving in.

Apr 06 01:27 AM

[igggy:]

APOL was a stock of the month at citronresearch.com right before the earnings. Hence the market reaction.

Apr 14 01:00 AM

[User 399866:]

Average age of UOP students is around 35 - the majority 99% fulltime working. UOP only charges for one class at a time so the amount of the default risk is limited to one class instead of an entire year like traditional colleges.

Apr 22 10:29 AM