For-Profit University Operator Apollo Group Could Outperform In 2012

| About: Apollo Education (APOL)

By Rapha Angel

The name "Apollo" immediately conjures up images and feelings of power. The Greek deity of truth and forays into outer space come to mind. Apollo Group Inc. APOL is aptly named as it is a strong presence in the field of education. It owns several for-profit educational institutions and is based in Phoenix, Arizona.

This stock trades around $57. It even crossed the high point of its 52-week range of $37.08-$57.51. It does not pay a dividend. The earnings per share is $3.53, and price to earnings ratio is 16.38. The company operates in the education and training services industry, and has 56,470 employees.

Apollo was seen in the news last year when its MACD (a histogram using exponential moving averages) entered bullish territory. It had been named a "buy." That was at the end of November 2011 and whoever did buy at that time surely profited, as the stock has already gone up $9.

Lots of news affecting Apollo came out recently. When it rains, it pours. There was an article on student debt quoting a very risqué comment of Warren Buffett which reads that it is only when the tide goes out that we find out who was swimming "unclad," to use a euphemism. This was in relation to student debt and wondering whether it is the next financial bubble, which means a situation of increasing price and decreasing value with a foundation of heavily leveraged assets, here, with government loans.

Apollo was named in the leading indicator section as a case in point and that one should take a look at the for-profit college sector. About 50% of student loans made to such institutions end up in default. Can the student loans be justified in relation with money earned after graduation? In many cases not. Consider that the average billionaire who dropped out of college is worth $5.3 billion; Bill Gates being an example, and the average bachelor of whatever discipline who is a billionaire is worth $2.9 billion, on average. This is in no way diminishing the value of education, just a very unusual statistic. Indeed, 20% of U.S.-based millionaires never attended college.

In another news report, a put-seller was having fun with Apollo. More than 9,400 options traded in that one day, with the seller looking to sell into volatility. One sale of 7,400 puts was made and then, within 2 minutes, a block of 111,000 shares was sold. Exciting market activity by some seasoned players -- or newcomers who knew their stuff.

Still, in November of 2011, a University owned by an Apollo indirect majority-owned subsidiary, Universidad de Artes, Ciencias y Comunicacion ("UNIACC"), was advised its national accreditation would not be renewed. The National Accreditation Commission of Chile decreed this. Without the accreditation, government help, which amounted to 30% of UNIAAC's revenue in 2011, would no longer be available. UNIAAC had generated $27 million revenue with operating losses of $13 million. $21 million of goodwill and assets related to UNIAAC had been recorded in Apollo's balance sheet. An impairment of UNIAAC's assets would be reflected in the coming quarter's results for sure.

One of Apollo's competitors is Corinthian Colleges Inc. COCO. Its market capitalization is $240 million; its earnings per share is -$1.81 and price to earnings is therefore negative. This puts Apollo way ahead. Corinthian's net income is -$152.56 million as opposed to Apollo's of $483.21 million. Its price/earnings to growth ratio is 1.1 as compared with Apollo's of 2.68. Apparently, Corinthians does not live up to its beautiful name as Apollo does.

Apollo's trading volume is 1,912,920 which is the average figure for the past three months. Its return on equity is 31.84%, and its revenue is $4.59 billion. Not surprisingly due to regulation, and something for it to work on for sure, Apollo's quarterly revenue growth year-on-year is -11.1% and its quarterly year-on-year earnings growth is -36.6%.

It has a comfortable debt-equity ratio of 8.63, and its current ratio is also sound at 1.51. While this year's growth is set at -31%, the figures for next year are good at +7.9%. The per annum growth for the next 5 years is expected to be 6.25% versus what it has been for the past 5 years, at 20.56%.

Apollo compares well with industry figures. Its market cap exceeds that of the industry as the industry figure is only $205.63 million. All it has to work on are its figures for quarterly revenue growth, as the industry shows a positive 9.9%. In my opinion, Apollo can successfully rebuild its recruiting program, which will reignite revenue growth.

Its price/earnings to growth ratio is a bit high at 2.68 compared to the industry, which is 1.1. This is also borne out by the fact that it is presently priced at its 52-week high point. Indeed, we were right when we noted more than year ago that Apollo would benefit from a Republican House. So, how much higher will this stock go? There is a target set of about $66. If it shows us the same trend as it has since last November, then it might just keep going. This is stock worth watching. We do live up to our names, more often than not.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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