Apollo Group, the private education provider, fell 16% in a single trading session after it lowered its 2012 guidance. Shares in Apollo Group (NASDAQ:APOL), which operates the University of Phoenix, closed at $43 a share, a six-month low.
Full year outlook Apollo maintains its full-year 2012 revenue outlook for $4.1-$4.3 billion, however, it lowered its operating profit guidance from $655-$750 million to $625-$725 million. Analysts were expecting $4.3 billion in revenue and operating profit of $747 million, which was at the high end of its previously guided range. The midpoint of the guidance would indicate an 11% decline in revenue compared to 2011. Operating profits are expected to fall about 30%. Enrollment forecasts for the second quarter of the year are lowered significantly as well. Previously, Apollo expected a 13% increase in enrollments; it now expects no or low single digit growth.
Though industry environment Apollo and its competitors, which once were the Wall Street darlings, have faced a tough environment to operate in. The whole private for-profit education industry received a lot of bad publicity after the government announced an investigation into the sector in 2010, concerning the misuse of Federal Pell Grants. Besides outright cases of fraud, media reports frequently question the value of the accreditations of private institutions, as for-profit universities face much lower graduation rates in combination with much higher student default rates. The latest release of Apollo, once more, indicates that the private education industry remains unattractive to invest in. Investors in Apollo lost 11% over the last 2 years; investors in competitors Strayer (NASDAQ:STRA) and DeVry (NYSE:DV) have lost 47% and 34% respectively.
Unattractive investment case Price-earnings ratios of 10-12 times for the three major players seem attractive. However, if profits are expected to fall further (after Apollo guided a 30% decline in operating profit for 2012), the low ratios do not provide an accurate picture. Despite a slowdown of industry growth due to scandals (which led to slower growth in student enrollments), net margins are still relatively high at 11-17%. Slower enrollment growth, students finding it difficult to obtain loans, and a government looking for spending cuts will all be a drag on the profitability for the sector in years to come. With this gloomy outlook for the industry in the medium term, I would not consider an investment in either Apollo Group or any of its competitors.
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