Apollo Group Inc (APOL): The Sell-Off of This Educational Stock Is Overdone

Page 1 of 2

As the costs of higher education rise, the stocks of for-profit education companies find themselves in trouble. Apollo Group Inc (NASDAQ:APOL) has recently reported its first quarter earnings, showing that new degree enrollment has slumped 24.5%. Investors have punished the company’s stock, pushing it down 14% year-to-date. It’s worth noting that the company has beaten earnings estimates by $0.20 while missing revenue by $18.27 million. As the company is making money, are investors missing something when selling the stock?

Apollo Group Inc (NASDAQ:APOL)

Tough outlook

Education company stocks greatly depend on student loan interest rates and the country’s employment situation. Total student loan debt is near $1 trillion in the U.S., surpassing both credit card debt and auto loan debt. The main problem is that a lot of families do not do the necessary planning before enrolling in an education program. This leads to problems with debt repayment.

Fears about the student loan bubble as well as dropping enrollment have put pressure on some educational stocks, though some others have done fairly well this year. ITT Educational Services, Inc. (NYSE:ESI) and DeVry Inc. (NYSE:DV) are up 40% and 35% respectively. Enrollment trends in these companies do not differ greatly from Apollo Group Inc (NASDAQ:APOL)’s, however, as the whole industry is facing headwind.

Valuation

Apollo Group Inc (NASDAQ:APOL) trades at a 9.76 forward price-to-earnings ratio, having roughly the same valuation as ITT Educational Services, Inc. (NYSE:ESI), which trades at 9.69 a forward price-to-earnings ratio. DeVry Inc. (NYSE:DV) trades at a premium compared to the other companies’ stocks, scoring a 12.79 forward price-to-earnings ratio. The fact that DeVry has zero debt and pays a dividend that yields 1.07% could be a part of that premium. ITT has a 0.95 debt-to-equity ratio, while Apollo has low debt and 0.08 debt-to-equity ratio. Apollo is the most attractively stock in this group, thanks to a sell-off that occurred after the earnings report. Attractive pricing alone does not move stocks higher, however; it’s the future prospects that matter. Let us take a look at what could happen.

What’s behind the corner?

Here’s what we have. The cost of education is rising, and fewer people are enrolling. Estimated sales decline for current fiscal year is -14.5% for Apollo Group Inc (NASDAQ:APOL), -16.9% for ITT Educational Services, Inc. (NYSE:ESI) and -5.3% for DeVry Inc. (NYSE:DV). The companies are trying to confront this trend by cutting their costs. Doing so has helped them beat earnings expectations in the recent quarters.

Investors are more focused on what might happen further down the timeline. Earnings estimates for the next year have shed 19% for Apollo Group Inc (NASDAQ:APOL), 2.5% for ITT Educational Services, Inc. (NYSE:ESI) and 7.5% for DeVry Inc. (NYSE:DV). It is highly unlikely that education companies will be able to counter declining enrollment rates with further cost cutting because cutting costs has its limits.

The problem of possible debt defaults is more long-term. If you do not plan to own any of the abovementioned stocks for a decade, you should probably not be concerned. The declining enrollment trend is the main problem in the foreseeable future. This trend is fueled not only by rising fees, but also by a shift that is happening in the way that people want to get their education. More emphasis is put on immediate results, and fewer people can afford to wait for several years before receiving their degrees.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!