Apollo's 1Q Results Show Why We Don't Like The For-Profit Education Space

| About: Apollo Education (APOL)
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Industry proxy for the 'Education (For-Profit)' group, Apollo (NASDAQ:APOL) reported weak fiscal first-quarter 2014 results. Net revenue declined to $856 million to $1.1 billion in the first fiscal quarter of last year. University of Phoenix Degreed Enrollment fell nearly 18% from the same period a year ago, while New Degreed Enrollment tumbled nearly 23%.

Image Source: Apollo

Operating income dropped significantly ($169 million, was $231 million), and income from continuing operations, excluding special items, came in at $1.04 per share compared to $1.22 per share in last year's quarter. The for-profit education provider's cash balance shrunk to $917 million from $1.52 billion as it paid down debt. Net cash from operations fell to $129 million in the three months ended November 30, 2013, from $210 million in last year's quarter. The performance wasn't pretty, to say the least.

Though declining profits, but profits nonetheless, were enough for the market to gain interest in shares, perhaps needless to say, we don't like the trajectory of fundamentals. The steep decline in enrollment is a serious issue that we need to see resolved before we would come anywhere close to considering shares for the portfolio of the Best Ideas Newsletter. For 2014, the company expects a large decline in net revenue to the range of $3-$3.1 billion and a sharp drop in operating income to the range of $400-$450 million, excluding the impact of special and restructuring items.

Valuentum's Take

The higher education industry is fragmented with no single private or public institution garnering significant market share. The for-profit education space competes primarily with traditional four and two-year degree-granting accredited colleges and universities. Industry participants are exposed to significant regulation on both the federal and state level and must maintain institutional accreditation to participate in Title IV programs. Risks to federal student funding aid programs and "gainful employment" challenges pose addition threats to the business. We don't like the significant regulatory risks of the industry, and Apollo's results do nothing to change this view.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.