On Jan 25, we upgraded our recommendation on
Apollo Education Group, Inc.
) to Outperform from Neutral after it beat the earnings
expectations in the first-quarter of fiscal 2014 and raised 2014
revenue, operating income and cost savings targets despite weak
revenues. Apollo Education carries a Zacks Rank #2 (Buy).
Why Raised to Outperform?
On Jan 7, Apollo Education reported first-quarter fiscal 2014
results. Despite declining 14.8% year over year, Apollo
Education's earnings of $1.04 per share outpaced the Zacks
Consensus Estimate by 15.6%. We believe that significantly lower
cost and taxes in the quarter helped the company beat earnings
expectations despite weak revenues and declining enrollments.
However, encouragingly, management indicated that December rate
of new enrollment decline was better than the first quarter.
Also, student persistence trends were strong; improving 140 bps
(year over year) in the first quarter as the retention rates were
better in the quarter with the company's student retention
initiatives gaining traction. In fact, management expects
enrollment trends to improve throughout 2014.
Notwithstanding weak top-line and declining enrollment trends
in the first quarter, Apollo Education raised its 2014 revenue,
operating income and cost savings targets. Apollo Education
increased its top-line guidance for fiscal 2014 to a range of
$3.0 billion-$3.1 billion from prior expectation of $2.95
billion-$3.05 billion. Adjusted operating income guidance was
slightly increased from a range of $375 million-$450 million to a
range of $400 million to $450 million. The company also increased
its cost savings target by $25 million for fiscal 2014 and now
expects $325 million in FY14.
Estimates were largely revised upwards in response to the
better-than-expected earnings results and the enhanced guidance.
The Zacks Consensus Estimate for 2014 and 2015 increased 6.2% and
5.8% over the last 30 days, respectively.
Apollo Education has accelerated efforts to right-size its
business through significant layoffs and campus closings which
should make it more competitive in the long term. Apollo
Education's investments in adaptive learning, curriculum
development, new learning systems/student service platforms and
recent price cuts should improve student value proposition and
retention rates. We believe these turnaround efforts should
improve enrollment trends and boost margins. All these factors
propelled us to upgrade our recommendation on Apollo
Other Stocks to Consider
Investors interested in the education sector can invest in
American Public Education Inc
Strayer Education Inc.
New Oriental Education & Technology Group
). All these stocks have the same rank as Apollo Education.
In fact, the education sector is witnessing a positive
momentum with President Obama's expanded federal support to help
more students afford college education and other recent positive
educational policy changes.
AMER PUB EDUCAT (APEI): Free Stock Analysis
APOLLO GROUP (APOL): Free Stock Analysis
NEW ORIENTAL ED (EDU): Free Stock Analysis
STRAYER EDUC (STRA): Free Stock Analysis
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