American Public Education: Earnings Scorecard

| About: American Public (APEI)

American Public Education Inc. (APEI), an online provider of higher education to the military and public service communities, delivered better-than-expected third-quarter 2010 results on November 8, 2010.

Street analysts had nearly a week to ponder on the news. In the paragraphs that follow, we cover the recent earnings announcement, subsequent analyst estimate revisions and the Zacks Rank as well as long-term recommendation for the stock.

Earnings Report Review
American Public’s quarterly earnings of 30 cents a share beat the Zacks Consensus Estimate by a penny, and rose 11% from 27 cents earned in the prior-year quarter. The Zacks Consensus Estimate was stable prior to the earnings announcement.

Total revenue of $48.3 million were marginally ahead of the Zacks Consensus Estimate of $47 million reflecting an increase of 32% from the prior-year quarter.

Total net course registration surged 25% to approximately 69,200, and net course registrations from new students grew 9% to approximately 16,000. As of September 30, 2010, about 77,700 students were enrolled in the system, reflecting an increase of 31%.

Management Guided
American Public Education now expects fourth-quarter 2010 earnings between 45 cents and 47 cents a share. The current Zacks Consensus Estimate of 47 cents lies at the high-end of the guidance range.

Management predicted a revenue increase in the range of 27% to 30% for the fourth quarter.

American Public Education now expects fourth-quarter 2010 net course registrations to jump between 26% and 29%, and net course registrations from new students to rise between 18% and 20%.

(Read our full coverage on this earnings report: American Public Education Beats)

Agreement of Estimate Revisions
Clearly, a positive sentiment is palpable among analysts, who remain optimistic about American Public’s performance. Following the earnings release, the Zacks Consensus Estimate has been rising with analysts remaining bullish on the stock. The better-than-expected third-quarter 2010 results and a projected growth in student enrollments for the fourth quarter, despite the regulation proposed by the Department of Education, have boosted analysts’ confidence.

However, analysts also remain cautious as American Public pointed that the enrollment of military students continues to be adversely affected by increased military operations in the U.S., and the deployment of military personnel in remote areas with limited accessibility to the Internet. Although, management informed that in order to offset the slowing pace of military enrollments, it is now focusing more on civilian students, some of the analysts continue to take a conservative stance.

The Zacks Consensus Estimates have been increasing following the earnings release. In the last 7 days, 9 out of 14 analysts covering the stock increased their estimates for fourth-quarter 2010, and 3 analysts lowered their estimates. For first-quarter 2011, 6 analysts moved their estimates upward, whereas 2 analysts moved their estimates downward in the last 7 days.

In the last 7 days, 9 analysts increased their projections and only 1 analyst lowered estimate for fiscal 2010. For fiscal 2011, 9 analysts raised their estimates and 2 analysts chopped their estimates.

The risk looming currently over the education sector is the regulation proposed by the Department of Education that may weigh upon students’ enrollments and the company’s profits. Recently, the Department of Education proposed that an educational program could only qualify for Title IV funds, if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios. The company derives a major portion of its revenues from federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.

The sector bellwether Apollo Group Inc. (APOL - Analyst Report) has also cautioned that enrollment in its first-quarter 2011 would drop by more than 40%, and withdrew its outlook for the fiscal year, citing an uncertain regulatory environment.

Magnitude of Estimate Revisions

Following the earnings release, most of the analysts have been raising their estimates with some holding a cautious view on the stock, and lowering their estimates. However, the magnitude of estimate revisions in the upward direction indicates that the analysts remained confident about the stock’s performance.

In the last 7 days, the Zacks Consensus Estimate for fourth-quarter 2010 rose 3 cents to 47 cents, and for first-quarter 2011 it again increased by 3 cents to 48 cents a share. For fiscal 2010, the Zacks Estimate climbed 3 cents to $1.53, and for fiscal 2011, the Estimate jumped 8 cents to $1.91, in the last 7 days.

The current Zacks Consensus Estimate for fourth-quarter 2010 range from a low of 46 cents to a high of 48 cents. For fiscal 2010, the estimates range from $1.52 to $1.55.

American Public Holds Zacks #3 Rank
American Public’s shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.

American Public Education’s focus on serving military and public service personnel, high student referral rates and accreditation enable it to consistently deliver impressive top and bottom lines. Its sustained effort to expand educational programs helps the company to boost enrollment. Further, its debt-free balance sheet and healthy cash reserves augur well for future operating performance. However, due to an increase in military operations, American Public is witnessing a drop in the enrollment of military students. To offset this, it is now focusing more on civilian students. Surprisingly, despite the stiff regulation proposed by the Department of Education, the company has predicted a growth in student enrollment for fourth-quarter 2010. However, we prefer to be Neutral on the stock.