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Apollo Group Could Move to the Head of the Class

Despite the increased scrutiny, growth looks solid


Since July26, shares of Apollo Group (NASDAQ:APOL) 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:

  • Expectations-beating earnings reports. Apollo has beaten analysts’ expectations in five of the last five reporting periods. In its latest second quarter, Apollo reported 45 cents a share in adjusted EPS — 11 cents above analysts’ expectations, as higher tuition fees more than offset a decline in student enrollments.
  • Out-earning its cost of capital. Apollo is earning more than its cost of capital – and holding steady. It produced unchanged EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of its fiscal 2011, Apollo’s EVA momentum was 0%, based on first nine months’ 2010 annualized revenue of $4.9 billion, and EVA that fell from $515 million annualizing the first nine months of 2010 to $493 million annualizing the first nine months of 2011, using an 8% weighted average cost of capital.
  • Rising sales, strong margins and a cash rich balance sheet — with some debt. Its revenue has grown at an average rate of 18% over the last five years while its net income has declined at an 8% annual rate over that period — yielding a solid 12% net profit margin. Although its debt gas grown, its cash has been rising much more quickly. .  

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.
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.

Article printed from InvestorPlace Media,

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