American Public Education
) delivered solid top and bottom-line results in the second quarter
that surpassed both management as well as the Zacks Consensus
American Public reported second quarter 2012 earnings of 51
cents per share, beating the Zacks Consensus Estimate of 45 cents
by 13% and the prior-year quarter earnings by 4.1%. Earnings were
also significantly above the guidance range of 41 cents to 47 cents
driven by better-than-expected top-line and enrollment growth in
Total revenue increased 23% year on year to $74.6 million and
was slightly above management's expectation of a growth in the
range of 14% to 22%. Revenues also edged past the Zacks Consensus
Estimate of $72.0 million. The top-line growth was driven by brisk
student enrollments in the quarter, particularly from civilian,
military, and veteran students.
Operating income for the quarter was almost flat at $15
Total enrollments increased 18% to approximately 92,900; at the
higher end of the company's guidance of recording growth in the
region of 12% to 18%. New student enrollments grew 4% to
approximately 19,600, also at the higher end of company
expectations of growth in the range of 2% to 4%.
Changing regulatory requirements are taking a toll on most
education companies' enrollment growth. Recently, a provider of
post-secondary degree programs,
ITT Educational Services Inc.
), announced a 15.7% decline in total enrollment in the second
quarter 2012, which resulted in a top-line decrease of 15.0%.
Apollo Group Inc.
) reported a 13.1% decline in total third-quarter enrollments at
the University of Phoenix, the company's wholly owned subsidiary,
which pulled down its total revenue by 8.5%. In fact, American
Public features among the very few education companies that have
booked positive enrollment growth.
Costs in Detail
General and administrative expenses were 21.6% of revenue in the
quarter, up from 17.9% in the prior-year period. The increase was
driven by higher bad debt costs (as the company shifted focus to
civilian students), investments in information technology upgrades
and Title IV processing automation (to reduce abuse of student aid)
and increased expenses to adapt to regulatory changes.
Instructional costs and services were 32.5% of revenue in the
second quarter of 2012, lower than 37.8% of revenue during the
second quarter of 2011.
Third-Quarter 2012 Outlook
Like always, American Public Education introduced its financial
guidance for the next quarter of 2012. The company is expecting
revenue growth in the range of approximately 16% to 19% for the
third quarter of 2012. Management now expects third quarter 2012
enrollments to rise between 16% and 18% over the prior-year period.
New student enrolments are expected to remain flat from 2011
levels. Management further projects third quarter 2012 earnings
between 46 cents and 51 cents a share.
The company is taking steps to reduce student abuse of the Title
IV Funds (federal student financial programs) and thereby improve
student outcomes. The educational institution is under the scanner
due to the rise in abuse of funds, mostly by civilian students who
use the balance fund (fund is usually more than American Public's
tuition costs) to meet living expenses. Management analyzed that
25% to 35% of enrollments in both the third and fourth quarters of
2011 came from such students. The company's fraud prevention
initiatives are reducing enrollment of students who abuse funds,
which explains the muted year-over-year enrollment growth
expectations for the third quarter. Management justified that in
the absence of such enrollments in the past quarter, the
third-quarter 2012 new enrollment growth would have been in the
We currently have a Neutral recommendation on American Public.
The stock carries a Zacks #3 Rank in the near term ('Hold'
Overall, we believe that the company's affordable tuition costs
and the shifting of student focus to the civilian market bode well
for long-term growth. In addition, the company's initiatives to
improve student quality augur well for long-term growth. American
Public is developing its technology infrastructure to support a
larger and more diverse student population. Further, it is making
investments to automate Title IV processes and has launched an
ePress initiative, which will help reduce costs and thereby
However, the focus on civilian growth as well as initiatives to
curb fund abuse will be a headwind for margins. Moreover,
uncertainty of growth in military enrollment due to possible
changes to the Department of Defense tuition assistance programs is
also a concern. We prefer to remain on the sidelines due to a tough
AMER PUB EDUCAT (APEI): Free Stock Analysis
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