Now that the holiday season is behind us, it's time again for
earnings season. Rather than try to predict what will happen as
we sometimes do, this week we're looking at some stocks that
reported last week.
In particular, I'm going to look at Apollo Education Group (
). The company is a for-profit education company that operates
the University of Phoenix, Institute for Professional
Development, The College for Financial Planning Institutes
Corporation and several other brands.
The company's stock jumped 14% after it reported adjusted
earnings of $1.04 per share for the quarter that ended Nov. 30.
Analysts had expected Apollo to earn 90 cents per share. The
company has been cuttings costs aggressively of late as
enrollment has fallen. It announced in October 2012 that it
planned to close 25 campuses and 90 other locations. Most of
those closings happened before the end of the company's fiscal
year in August of 2013.
That Apollo managed to beat earnings estimates is more a
testament to the company's ability to control costs than to its
ability to reverse the decline it has seen in its business.
Revenue in the quarter was $856.3 million, compared to estimates
for $861.5 million.
The company's business has been in decline for some time now,
for a variety of reasons.
First, as a ten-year comparison of APOL's performance
compared to the S&P 500's will show you, the company tends to
do well the economy is faltering, and not so well when the
economy is healthy. This is because in times of high
unemployment, people go to school to acquire new skills to make
themselves more attractive to potential employers. Given that the
economy seems to be on the mend now, Apollo is likely entering a
period of declining enrollment for cyclical reasons.
The second, and more serious reason the company's stock has
been falling recently is that potential students, and regulators,
have noticed that for-profit educators tend to have lower
graduation rates than traditional schools. Low graduation rates
mean that students for whatever reason aren't finishing the
company's programs. This is bad for students as completing half
of the coursework in traditional the fields of study
traditionally offered at for-profit schools doesn't typically
lead to much in the way of employment. University of Phoenix
offers programs in fields like nursing or criminal justice where
a half-completed degree won't even get you a job interview.
Low graduation rates hurt Apollo in another way too.
Graduation is among the leading predictors of whether or not
someone will pay back student loans. Student debt is a hot topic
right now, both for politicians, and regulators who have noticed
that students who go to for-profit schools don't repay their
loans at higher rates than students who go to traditional
colleges and universities.
Potential new regulations on for-profit colleges are one
potential threat to Apollo's future, but the poor performance of
students is already having an impact. Enrollment at the
University of Phoenix fell by 18% in the most-recent
quarter, while new student signups fell by 23%, suggesting the
enrollment decline is likely to continue.
The company can continue to cut costs for to keep profits up
for a while, but at some point the decline in demand for its
products is going to catch up with the bottom line.
Given the stock's big post-earnings jump, and the fact that
the potential for big news in the short-term seems to be to the
downside, traders could consider a February 33/36 bear-call
spread for a 35-cent credit. This trade has an assigned return of
13.21%, or 117.58% on an annualized basis (for comparison
purposes only). This trade will return the full profit so long as
the stock closes below $33 per share at February expiration,
giving it about 7% downside protection.