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Was I Wrong About For-Profit Schools?

Apollo's earnings beat doesn't change deteriorating fundamentals


On the heels of my long-term bearish argument regarding for-profit schools, Apollo Group (NASDAQ:APOL) blew away earnings by 24 cents today. But hold on before you stick a fork in me and buy the stock, because the quality of those earnings wasn’t so hot.

Net revenue actually fell 8.5% year-over-year, which should be the first tip to look beyond the announcement of an earnings beat. Sure enough, net income excluding extraordinary items was down 20% from $1.51 to $1.20 per share. The company’s University of Phoenix operation saw enrollment crater 13.1%. New degree enrollment fell 8% (5.3% adjusted for start dates).

Apollo also undertook an aggressive share repurchase plan this past year, spending $736 million over the past nine months.

The result is that shares outstanding have decreased 15% since the comparable quarter last year. If you factor the buyback into the results, net income actually fell almost 40%. Whoa! The company also depleted its cash reserves in order to pay down its debt, decreasing it from $599 million to $126 million.

Apollo is fortunate in that business remains strong enough to have generated $415 million in free cash flow in the past nine months. Clearly, it’s trying to stay ahead of the deteriorating picture for the sector by wiping out debt, returning capital to shareholders via the repurchases (and masking even worse operating results), and getting its house in order for the storm that is already upon it.

What does this all mean for Apollo going forward? I think smart management would try to steer the business away from reliance on government student-loan financing, if at all possible, although some 85% of degree seekers pay with those loans.

The company may also attempt to change its marketing and business model. It’s still making a solid profit and has great cash flow, so it’s possible Apollo may not end up being a casualty of the coming apocalypse that I’ve foretold.

Other companies may not be so fortunate. Strayer Education (NASDAQ:STRA), DeVry (NYSE:DV), Career Education (NASDAQ:CECO), Education Management (NASDAQ:EDMC), ITT Educational Services (NYSE:ESI) and The Washington Post Co. (NYSE:WPO), all face their own challenges. Proceed with caution.

Lawrence Meyers does not own shares of any company mentioned.


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