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I am a private investor building a value focused portfolio. While I do not work directly in investing, I do have a financial background and hold the CFA designation. The goal of Margin of Safety Investing is to share my investing journey as I review and analyze investing opportunities using a... More
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  • APOL quick review - A good investment candidate 0 comments
    Sep 24, 2010 6:24 PM | about stocks: APOL

     Intro

    Apollo’s stock is currently priced at $46. I put it into my ideas pipeline on the basis of its 5 stars wide-moat rating from Morningstar

     1- Business Performance Risk

    Metric

    Status

    FCF / Sales

    Last twelve months (“LTM”): 17% in line with historical performance over the last 10 years of between 14% and 22%

    ROE

    LTM: 50%. Historically APOL’s ROE has been between 30% and 60%, with the 5 last years between 50 and 60%

    ROA

    LTM: 22%, at the low end of historical performance, with ROA’s between 19% and 32%

    Revenue Growth

    Growth has been very high and consistent historically, with 10-year average growth of 20%+ with only 1 year over year growth below 10% over the last 10 years

    Cash distribution to shareholders

    APOL does not pay a dividend but has been a constant repurchaser of shares with about 20% share repurchased over the last 5 years.

    APOL is a very high cash and earnings business with FCF/sales level in excess of 15% almost every year and ROA’s well above 15%.  In addition the company has been growing fast and consistently.  The only downside is its lack of dividend; however management still returns money to investors via repurchases. 

    The company’s growth may slow down a bit in coming years, but even at a 10% rate, given its ROE the company would have 80% of earnings to pay a dividend or do buybacks (which they prefer given the concentrated ownership structure).  At the current P/E it means the company could buy more than 5% of its own stocks every year and increase its cash position!

     2- Balance Sheet Risk

    Metric

    Status

    LT Debt / Equity

    0.1x, very low as APOL carries very little debt. However note that the company carries a fair amount of other liabilities which we will need to review if we perform a Company Analysis of APOL.

    Current Ratio

    1.3x which is a bit aggressive but not problematic and is in line with APOL’s practices over the last 3-4 years

    APOL carries little debt and liquidity risk and appears conservatively financed. However we should look into the company’s other liabilities before investing into the company.

     3- Valuation Risk

    Metric

    Status

    Cash Return

    13.4%, which is quite attractive, the company could generate enough cash to buy itself entirely in 6 years at this price!

    P/E

    11.9x, below industry and S&P. Over the last 5 years APOL’s P/E averaged 21.5x

    Apollo’s valuation appears attractive with a high cash return and low P/E relative to its industry, market and history. This is in large part driven by the current regulatory scrutiny over the education industry. However such an attractive valuation may well give us a large enough margin of safety to be comfortable with an investment in Apollo.

     Conclusion

    Apollo appears to have a very strong business, conservative balance sheet and a low valuation which potentially offers enough margin of safety to become an interesting investment.

    I will perform a Company Analysis of APOL.




    Disclosure: Long APOL
    Stocks: APOL
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