Earnings Scorecard: Apollo Group

| About: Apollo Education (APOL)

Apollo Group Inc. (NASDAQ:APOL), one of the world’s largest private education providers, reported earnings per share growth of 10.9% year over year to reach $1.63 in the first quarter of fiscal 2011. The result topped the year-ago earnings of $1.47 per share and also surpassed the Zacks Consensus Estimate of $1.35. On a reported basis, including one-time items, earnings came in at $1.61 compared with $1.54 in the prior-year quarter.

Quarterly Review
The Phoenix based company earned an income of $238.9 million from continuing operations, an increase of $9.9 million from the year-ago quarter. Including a pre-tax restructuring charge of approximately $3.8 million related to the reduction in force at the University of Phoenix and $0.9 million of incremental post judgment interest related to a securities class action lawsuit, net income dropped $4 million to $236 million.

Apollo delivered total revenue of $1,326.4 million during the quarter, up 5.4% from the year-ago quarter on the back of selective tuition price increases as well as a higher average enrollment at the University of Phoenix. Total revenue also beat the Zacks Consensus Estimate of $1,260 million.

Operating profit for the quarter under review decreased 4.0% to $407.0 million. Excluding special charges, operating profit decreased 5.0% to $412.0 million. Operating margin declined 20 basis points to 31.1%.

Agreement of Analysts
Analyzing estimate revision trends for the upcoming fiscal year 2011, we find a positive sentiment among analysts. Over the last 30 days, 17 of the 21 analysts covering the stock have revised their estimates upward while only 2 have moved in the opposite direction.

However, fiscal year 2012 follows a mixed trend in which 5 of the 17 analysts covering the stock have increased their estimates in the last 30 days while 7 of the 17 analysts moved their estimates downward.

For the next two quarters the analyst community holds a contrary trend. For the second quarter, 12 out of 19 analysts have revised their estimates upward while only 5 analysts expect earnings per share to go down in the last 30 days. For the third quarter of fiscal 2011, 10 out of 19 analysts have lowered their estimates, while 6 out of 19 moved in the opposite direction in the last 30 days.

Magnitude of Estimate Revisions
The magnitude of estimate revisions for Apollo depicts an optimistic outlook of analysts for the second quarter and fiscal 2011. Over the last 30 days, estimates for the second quarter and fiscal 2011 have increased by 5 cents and 26 cents, respectively. However, the estimates for Apollo’s third quarter 2011 and fiscal year 2012 have decreased by 2 cents each.

Our Recommendation
Apollo’s shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Our long-term recommendation on the stock remains ‘Neutral’.

Apollo has a dominating market position, quality growth approach and more consistent execution under a new management. Additionally, Apollo's operating model will stand to gain from its strategic initiatives directed at higher-margin and lower-default students.

In view of these efforts, the University of Phoenix has planned to roll out an Orientation Program in which it will require all students who enter the for-profit institution with less than 24 hours of college credit to participate in a free, three-week orientation program aimed at ensuring that students are ready for college-level work.

These endeavors, over the long term, will improve student persistence and completion rates and therefore reduce bad debt expense positioning the company for more stable long-term cash flow growth. However, such projects hamper near-term operating metrics in the guise of upfront marketing and instructional spends that the company incurs for those students.

On the other hand, Apollo carries risks related to accreditation, local regulations and currency exposure given its commitment to international expansion. We, however, note that the company is much less exposed to regulatory issues than many of its peers. Apollo Group is locked in intense competition with companies offering postsecondary education, such as DeVry Inc. (NYSE:DV), Strayer Education Inc. (NASDAQ:STRA) and Career Education Corp. (NASDAQ:CECO).

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Tagged: , Education & Training Services, Earnings
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