Apollo Group: Headed For The Moon or Splash-Down?

Over the past seven weeks Apollo Group (APOL) has lifted off from $55.10 to close at $80.25 this past Friday. Though revenue has grown consistently from $2.25B in FY05 (ended 08/31/05) to $2.72B in FY07 (ended 08/31/07) net income has stagnated in the $409M/$428M range (Reuters). Investors, primarily large cap funds like the margins, not to mention the growth. Oddly enough this holds true in spite the fact that APOL doesn't pay a dividend.

The question is where is APOL heading, for the moon or a splashdown? With a PEG (5 yr) at 2.06 compared with the industry average (education and training services classification) of 1.86, it is fairly safe to assume that the consensus believes there is further growth ahead for the industry as a whole.

On the one hand, pundits can make the argument that as the economy slows the same logic that applies to recruiting, temp and some media companies as being less desirable should also apply to APOL. As fewer jobs become available per applicant, the nature of supply and demand dictates lower revenues ahead. Proof of this is the softening in net profits in comparison with higher revenues that were predominantly generated through higher fees, not necessarily a higher head count. As demand wanes, raising fees to cover rising expenses should disappear.

On the other hand, many not able to find work might conclude that their only alternative is a better education or better training. As the U.S. economy braces itself for global challenges of the 21^st century, many will opt to transfer to high demand professions/skills and will find APOL offering the course to get them there. In general, these analysts claim that the U.S. economy is already in transition and the demand for re-education and training will only increase over the next decade as an ever increasing number of 'old world' manufacturing jobs head for overseas. In addition, APOL's overseas enrollment is somewhat limited today and heavily relies on U.S. revenues. Any deterioration in U.S. campus enrollment will be covered by Axia College through its worldwide computerized education delivery system.

Standing on one foot, one could surmise that the recent acquisition of Aptimus will not only enhance U.S. web advertising but is primarily to help Axia lift off as well. Honestly, I don't quite know what Aptimus will do for APOL. This business model tends to be geographically oriented. A working adult in Phoenix is not interested in a course given in Sacramento. There are ways to advertise in local yellow pages (on line) and other localized sites, but the jury is still out on whether low volume sites are worth the money or one is better of with high traffic sites that feed into a regional page based on the IP.

Switching to the other foot, I find it amusing that Google Finance regularly links non related "Apollo" articles to APOL. It's too bad there aren't any moon missions these days, because now I know where to read about them or other companies with similar names.

From an inverted headstand view (ran out of hands and feet), in relation to the split adjusted IPO price of $0.72 per share from December 1994, long term holders see no reason to sell at $80.25. Even if the stock were to retrace to $60 (fat chance - don't get excited!), they are well ahead of the game. Taking this into account, I find the recently announced $500M share buy-back program superfluous unless it is designed to signal that APOL will defend its stock price should the market in general run into trouble. Nah, even that is unnecessary as there are over 300 institution and mutual funds controlling 75% of the float. It is more than likely that some would be delighted to add to their position at a deep market discount.

The bottom line is that major institutional and mutual fund holders are not selling. Should several major holders get cold feet, then and only then, consider selling. For now, as after any major up-tick, waiting for a better entry price may be prudent and don't forget to follow the institutional holders on this one. They definitely marked APOL correctly from first grade.

Apollo and the Nine Muses (van Balen)

Disclosure: Regrettably no conflicts since 1994, likely suffering from nymph inspiration deficiency.