Apollo Group Could Move to the Head of the Class

by Peter Cohan | August 9, 2011 12:23 pm

Since July26, shares of Apollo Group (NASDAQ:APOL[1]) have lost 19% of its value. But throughout 2011, the company’s profitability has continued to get a boost — from a return on average equity of 45% in 2010 (the average S&P 500 company earns 24.4%) to 63% in its most recent second quarter.

But the for-profit education industry has fallen under regulatory scrutiny. As I wrote last year, Washington uncovered abusive practices in the industry — including aggressive student recruiting practices, extending student loans to people with little ability to repay them, very low graduation rates, and less-than-advertised job prospects for those who do graduate.

But this doen’t seem to be stopping Apollo, which operates the University of Phoenix. Here are three reasons to consider its stock:

One negative — it is hard to value its stock. Apollo’s price-to-earnings-to-growth (where a PEG of 1.0 is considered fairly priced) is undefined. That’s because despite a low P/E, analysts expects its earnings to fall fast in the next year. It currently has a P/E of 14.5 and its profit is expected to shrink 33% to $3.24 a share in 2012[4].
 
Apollo Group is likely going to survive the effects of tighter regulation and will be able to grow by acquiring rivals and cutting costs. Its ability to beat expectations despite these challenges suggests that the stock could rise after losing 19% of its value in the last few weeks.

Peter Cohan has no financial interest in the securities mentioned.

Endnotes:

  1. APOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=APOL
  2. five of the last five reporting periods: http://investing.money.msn.com/investments/earnings-estimates?symbol=APOL
  3. higher tuition fees: http://www.reuters.com/article/2011/06/30/us-apollo-idUSTRE75T6HA20110630
  4. 33% to $3.24 a share in 2012: http://investing.money.msn.com/investments/earnings-estimates?symbol=US%3aAPOL

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