Apollo Group - Not Interesting At This Point, Despite Sell-Off

Mar.28.12 | About: Apollo Education (APOL)

Shares of Apollo Group (NASDAQ:APOL), the private education provider, ended the day 8% lower as the company announced its second quarter results Monday after the close.

Second quarter results
Apollo reported a net income of $64 million for the second quarter, or $0.51 per share, which exceeded the analyst consensus of $0.37 per share. Last year the company lost $66 million over the three month period. Revenues fell 7.5% on the year to $970 million, which beats analyst expectations of $933 million. Enrollments for its main University of Phoenix continued to fall by 12%, however enrollment growth will return later this year.

For the entire fiscal year of 2012 Apollo expects net revenue in the range of $4.1-$4.3 billion. Excluding special items, it expects operating income of around $625-$725 million. The outlook is unchanged from the update of February 28, when the company lowered its full year 2012 outlook which triggered a 16% decline in its shares on that day.

Shares in the private education provider have fallen to their lows of the decade. At a share price in the low forties the market values the company a little over $5 billion.
For the first half year of the fiscal 2012 the company generated $2.15 billion in revenues, down 10% on the year. Net income rose 25% to $213 million. For the whole year of 2012 the company is on track to generate $4.2 billion in revenue, and could earn close to $350-$450 million in net profits.
At its valuation the market values Apollo at 0.8 times annual revenue and 12 times its annual net profit. It has little long term debt and holds over $1 billion in net cash.

Investment thesis
Shares continue to trade around depressed levels as revenues are going to fall for a second year in a row. Net profits will fall as net margins will come in at around 9-11% of annual revenues, down from peak margins of 15% in the peak years.
With over a trillion in student debt, rising tuition costs and many observers openly discussing the "value" of a higher education degree, revenue growth and profitability will continue to remain under pressure in coming years. Furthermore there is always the remote possibility that new "scandals" will hit the private education industry, which has seen its fair share of malpractices over the last years.

With little growth in the years ahead and continued margin pressure, investors should stay away.

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