Students are starting to learn about Apollo Group

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Bobby Raines 01/13/2014

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 ( APOL ). 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.


Chart courtesy of stockcharts.com

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: APOL

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