Despite beating expectations in the first quarter of 2014,
American Public Education, Inc.
) share price declined 2% in response to poor second-quarter
American Public'sfirst-quarter earnings of 59 cents per share
crushed the Zacks Consensus Estimate of 47 cents by 25.5%. Earnings
also beat management's expected range of 43 to 48 cents.
The company beat expectations due to lower marketing expenses,
cost savings and efficiencies and the company's efforts to reduce
Earnings, however, declined 6.3% year over year due to continued
military enrollment hurdles and higher costs.
Revenues and Enrollment Details
American Public is the parent company of online learning
provider American Public University System (APUS) and campus-based
Hondros College, Nursing Programs which was acquired in November
Total revenue increased 6% year on year to $88.6 million,
beating the Zacks Consensus Estimate of $86.0 million by 3.0%. The
top-line growth was better than management's expectation of a range
of flat to an increase of 3%.
However, we believe the top-line beat was only due to the
inclusion of $7.2 million of sales from Hondros against the absence
of any such revenues last year. Revenues continued to decline at
APUS, down around 3% this quarter to $81.3 million, due to weak
Total enrollment at APUS declined 4% year over year to 105,800.
However, the shortfall compared favorably with the company's
expectation of 5% to 7% decline. New student enrollments (student
starts) at APUS declined 8% to 17,600, in line with management's
expectation of 7% to 9% decline.
Like the fourth quarter, APUS enrollments in the first quarter
were adversely impacted by continued volatility and softness in
military enrollments. In the quarter, total and new enrollments of
students using TA decreased 10% and 21%, respectively, year over
Enrollments by students using Department of Defense Tuition
Assistance or TA benefits were significantly affected by the recent
administrative changes by the military. Management believes that
marketplace confusion over recent changes to TA eligibility also
played a role in lowering TA enrollments.
However, the shortfall in total and new enrollments of students
using TA was better than the declines witnessed in the previous two
quarters - third and fourth quarter of 2013. Nevertheless,
management is unsure of when the TA program will return to
Total enrollments of students using cash or other source
decreased 3% in the quarter while that of students using veterans
benefits were up 14% year over year. Net enrollments of students
using Title IV funds decreased 4% year over year, slowing down from
the past few quarters due to lower persistence among civilian
students using Title IV.
Total enrollments at the newly acquired Hondros rose 14% in the
quarter to 1,290 students, driven by 43% increase in new
Operating income for the quarter declined 8.2% year over year to
$16.7 million due to higher costs related to Hondros which offset
lower expenses at APUS.
Selling and promotional (S&P) expenses as a percentage of
revenues improved 40 basis points (bps) to 19.7% of revenues due to
lower promotional costs at Hondros and favorable timing of expenses
at APUS. Instructional costs and services increased 150 bps to
35.4% of revenues due to higher costs at Hondros.
Further, bad debt ratio increased 140 bps in the quarter to 5.7%
due to a change in student mix to a higher percentage of civilian
On Apr 2, 2014, American Public acquired 25% stake in a
game-based learning company that develops education software, for
$1.5 million. APUS and Hondros plan to partner with this company to
develop courses, as well as enhance the existing courses with
interactive, personalized and adaptive learning environment -
thereby improving student outcomes.
Second-Quarter 2014 Outlook Soft
Management expects second-quarter 2014 total enrollments to
decline in the range of 2% to 5% while student starts are expected
to go down in the range of 4% to 7%. American Public expects
revenues to increase in the range of 3-5%. Management further
projects second-quarter 2014 earnings between 43 to 50 cents, which
fell short of the Zacks Consensus Estimate of 54 cents.
Management also stated that new student enrollments at Hondros
decreased approximately 10% in second-quarter 2014.
Other Stocks to Consider
American Public carries a Zacks Rank #3 (Hold). Other
better-ranked stocks in the education industry include
DeVry Education Group, Inc.
TAL Education Group
Lincoln Educational Services Corporation
). While Lincoln Educational sports a Zacks Rank #1 (Strong Buy),
TAL Education and Lincoln Educational Services have a Zacks Rank #2
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