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Apollo Group Inc (APOL): This Education Company Is Clearly Smart Despite Trouble

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The for-profit US education sector is a lesser favorite among investors, given the current decline in student enrollments, high student loan balances and negative publicity regarding government funding. However, this sector posted strong results prior to the recession and I am of the opinion that in the long run, as the economy picks up and the unemployment rate goes down, this sector will prove to be a good turnaround investment.

Apollo Group Inc (NASDAQ:APOL)

On March 25, one of the top colleges in this sector, Apollo Group Inc (NASDAQ:APOL), parent company of the University of Phoenix, reported its 2Q13 results. Its results clearly demonstrate the ongoing turmoil in the sector. Below I present key highlights of Apollo’s 2Q13 results and my take on whether or not you should invest.

Key highlights of Apollo’s results

Apollo Group Inc (NASDAQ:APOL) topped analyst’s estimates but still posted a 13% decline in its sales of $834.3 million, vs. analyst expectation of $824.7 million. Further 2Q13 net income dropped 78% to $0.12, vs. $0.51 last year. Excluding one-time items, net income was $0.34. Its disappointing results are mainly due to the downtrend in its enrollments. Its total enrollments fell 15% y-o-y to 300,800 and new enrollments dropped 20% to 38,900.

Restructuring

Given the decline in its enrollment and revenue, Apollo Group Inc (NASDAQ:APOL) has been aggressive on reducing its costs in order to protect its profitability. At its earnings call it increased its target savings by $50 million and expects a minimum $350 million savings by FY14, achieving 3/4 of the target in FY13.

In October 2012, it mentioned that it would cut 800 jobs and close 115 locations. Year to date, it has cut about 1,000 jobs and carried out 25% of its planned campus closures. It expects to complete the majority of its closures in 3Q13 and expects FY13 restructuring charges of $200 million.

Government scrutiny

This situation has affected most of the colleges within the for-profit education space. According to the US Department of Education, the default rate for the first three years that students are required to make payments is 13.4%, and for-profit colleges have reported even worse results. As a result, the Department of Education placed restrictions on government funding for schools/colleges whose students are not able to find suitable employment and are not able to pay their loans. Further, the current employment scenario is not providing any relief to the situation.

Now coming to Apollo Group Inc (NASDAQ:APOL); in 2008, University of Phoenix received the highest student financial aid funds of nearly $2.48 billion. In 2010, it came under government scrutiny after it was found that it had been engaging in deceptive enrollment practices and fraudulent solicitation of funds. The report issued by the Department of Education accused many for-profits of manipulating their default rates and mentioned that General Revenue Corp, a subsidiary of SLM Corp (NASDAQ:SLM), provided counsel on how to keep default rates down–and Apollo was one of its clients. However, Apollo and SLM both denied this and mentioned that loan forbearance was always a last resort.

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