More recently, University of Phoenix’s accreditation was put on probation by a review team from its accreditor, the Higher Learning Commission. The reason mentioned was that it failed to meet one or more of the commission’s criteria for accreditation. Given that Apollo’s sign-ups have fallen by 43% since 2010, this spells trouble as it targets a return to growth in its sign-ups by 2H13.
I agree the situation in Apollo looks pretty grim, but like every coin there is another side as well.
Sound business model
Companies in this sector have a very sound business model. Normally, these companies have gross margins ranging from 60-90%, strong balance sheets and lower capital requirements. Revenues mainly come from tuition or program fees, and a large amount of the costs are related to instructors’ fees. As it grows in size, it can gain on operational efficiencies and lower its fixed costs, and during downside, it can reduce its instructor numbers to lower its costs. Further, it doesn’t need huge capital requirements as most of its buildings are taken on lease and the majority of the for-profit colleges have strong cash balances and low debt.
Coming to Apollo Group Inc (NASDAQ:APOL), it is the largest among its peers in terms of revenue and also has posted strong and stable margins. Given the recent decline in revenues, it has been following a stringent cost-reduction plan (as explained above). As of 2Q13, Apollo has $821 million in cash and $91 million in debt. Further, cash flows are mainly used for capital expenditure and share buybacks. With such high cash balances, there may be a possibility for future dividend payout policies.
Future outlook
Currently, the sector is experiencing a downtrend with declining student enrollments, government scrutiny and high cost structure. However, in the long run, economic improvement and growing student enrollments will help to revive profitability in this sector. Further growth in employment rates and the resultant reduction in student loan balances will help to remove the negative publicity from these organizations.
Many colleges are also trying to improve their course offerings in an attempt to combat the increasing risk from online courses and tutors. Apollo plans to launch new career-oriented programs and is expanding partnerships with corporate customers.
Competitors
Apollo Group Inc (NASDAQ:APOL) is lagging behind its competitors with respect to its recent results. DeVry Inc. (NYSE:DV) posted a 3.6% decline in its 2Q13 revenues but showed growth in its student enrollments. Strayer Education Inc (NASDAQ:STRA) also posted a 9% decline in its 4Q12 revenues. But, in comparison with Apollo, it posted a much lower decline of 5% in both total enrollment and new enrollment numbers.
Conclusion
As mentioned earlier, this sector is poised for growth in the long run. Further, given a strong business model and solid balance sheet, companies in this sector are good turnaround investments.
Apollo, like its peers, is facing difficult circumstances, but the decline in Apollo seems to be more profound. If you already own the stock, hold it for the long run. If you are just entering the education space, I would suggest DeVry or Strayer as better options.
The article This Education Company Is Clearly Smart Despite Trouble originally appeared on Fool.com and is written by Sujata Dutta.
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