Scrutinizing Apollo: The Deeper You Look, The More Problems You See

One couldn’t help but notice the sharp drop in Apollo ((APOL) - $61) a few days ago in response to a downgrade from Credit Suisse. What’s more intriguing to us is the extreme change of view over a short 3-week period.

On April 1, analyst Kelly Flynn felt that concerns post the Q2 report were “overblown” and that concerns and less margin expansion were “already reflected” in valuation. As for concerns coming on the regulatory front, they were said to be “less credible than [they have been] for several years given management’s obvious constructive approach to educational quality and all regulatory issues.” In the note, the analyst went on to increase estimates and reiterate their Outperform rating and $95 price target.

Since the report, we have been seeing matters of real concern about Apollo and written about them right here. Because we are short the name, we were pleased to see Credit Suisse come out just 20 days later on April 21 with a downgrade of the shares. But it’s still puzzling that now the analyst feels exactly the opposite regarding regulatory scrutiny and a slowing of the business going forward.

Our best guess is that the deeper you look, the more problems you see. Again it’s not that the company is bad, but that the risk from more regulatory scrutiny and estimates that look simply too high argue for there being much more risk than most are factoring in.

Thankfully for Apollo shareholders, Deutsche Bank joined the cheerleading section by coming out with a Buy rating on the shares the same day as the Credit Suisse downgrade. The analyst at DB must have felt odd watching the stock tank that day, but was able to use the well worn phrase, “we loved it at $65 so we really love it down here at $60.”

Recently, the current administration has been making clear noises about reform in the credit card industry. This is just more evidence to us that the government will want to know that the debt that is being piled on students by for-profit educational companies is actually in their best interests. Apollo has mounted a major advertising campaign to keep visibility and enrollments up, but it will also ensure that they are in the sights of whoever might be interested in reforming questionable industry practices.

Last, there’s something about feel that we can’t ignore with this company. From the management commentary to the website, the company comes off as a enrollment and degree granting *machine* which can be seen as a good thing if you stand to profit from the volume. It’s not very consistent with an institution of higher learning or even a trade school. Everything shouts “enroll in a program” and it can be financed with student loans. We realize that Apollo Group is a real company and many students and alumni get good value from their involvement with the company. But it seems that many, possibly a majority, do not and Apollo has business practices that don’t seem above reproach.

Disclosure: As mentioned above, Research 2.0 is unabashedly short some shares of Apollo Group based on what we see as a mis-pricing of risk in the market price of the stock.

Comments

[Nathaniel C:]

The idea that Apollo is bad because it is for profit is misguided. ALL colleges are in fact for profit--they just dont pay taxes. That is why Harvard has a slush fund of $22 billion. Yale has $15 billion. It seems Harvard and Yale are for profit after all.

Apr 23 04:32 PM

[PROXIMO:]

Nat---Not sure that comparing a fake school to Harvard and Yale is comparing apples to apples.


On Apr 23 04:32 PM Nathaniel C wrote:

> The idea that Apollo is bad because it is for profit is misguided.
> ALL colleges are in fact for profit--they just dont pay taxes. That
> is why Harvard has a slush fund of $22 billion. Yale has $15 billion.
> It seems Harvard and Yale are for profit after all.

Apr 24 11:05 AM

[User 370365:]

Proximo, I wonder if you have gotten in close enough "proximity" to this company to realize that every institution under its umbrella is a fully accreditted institution of higher learning. Not sure that your comment in comparision to Nat's comments isn't like comparing apples to lemons with yours being the lemon.

As for Mr. Tuttle, glad to see he bases his investment decisions off of "feel" (i.e. "Last, there’s something about feel that we can’t ignore with this company."). Perhaps he should pursue getting an MBA from a "real" university like UOP such that he may use a little more sophisticated methodology of evaluating companies more so than just "feel", rumor mongering, conjecture and misinformation.

Apr 24 01:20 PM

[KSTHANE:]

My favorite line is the one where he says that Apollo launched major advertising to keep visibility and enrollments up. Maybe the reason they're advertising a lot more now is because it's a hell of a lot cheaper? Maybe their advertising is more visible (radio and TV spots as opposed to online ads) because they're chasing higher quality students which is an indicator of a higher quality program?

I also like that his reasoning includes that "the administration" will be watchful of students racking up piles of debt getting an education from Phoenix. First off, currently having 350,000 students is not some random fluke from clever advertising and marketing...it's an indicator of value and quality. Second, if the administration wants to target a racket in education they should focus on the far larger pool of people going to public schools that are racking up debt and not repaying. Those students aren't usually nearly as prepared to pay debts because they don't already have jobs like many APOL students do. "The administration" targeting a relatively small pool of non-trad students at Phoenix would be counterproductive to what it actually wants to accomplish.

Apr 27 02:04 PM