That Apollo Group Bandwagon Looks Rickety

by James Brumley | March 26, 2013 9:32 am

On the surface, it seemed like good news.

For-profit educator Apollo Group (NASDAQ:APOL[1]) topped earnings estimates for last quarter, and the market couldn’t buy into the stock fast enough; shares were up as much as 15% at one point on Monday. But the more time traders had to digest the news, the more they seemed to remember this company is still a train wreck.

Good News/Bad News

The good news is, Apollo did much better than expected last quarter, earning 34 cents (operating) per share, almost doubling the estimates of 18 cents.

The bad news is … that’s pretty much the only good news.

Although it topped estimates, revenue was off 13% year-over-year, falling from $962.7 million. Per-share income plunged 33% from the 51 cents per share Apollo earned in the same quarter a year earlier. Student sign-ups fell by 20% in Q2, which ended at the end of February, exceeding the expected 13% plunge.

The graduation head-count also fell by 20% at the University of Phoenix — Apollo’s primary venue. The company poured salt in its wounds by posting a 2013 revenue outlook that’s mostly on the lower side of this year’s consensus estimate of $3.73 billion.

Oh, and there’s still the not-so-small matter of Apollo’s pending probationary status.

The Higher Learning Commission recently opined that the University of Phoenix and its lesser-known Western International University both came up short of acceptable standards. While Apollo can appeal the probation — and certainly will — the probationary status puts the organization’s accreditation status in jeopardy[2].

If Apollo’s schools lose their accreditation, students will be ineligible for federally funded student loans. If that happens, Apollo’s waning enrollment numbers could worsen much faster.

Given the whole picture, one question immediately comes to mind: What were Monday’s early buyers thinking?

Reality Check

No need to beat around the bush here — the perception of good news drew a crowd into the stock based on hopes that the bad news had been priced in, and the earnings beat would spur the pending rebound.

Halfway through Monday’s session, however, it became clear that Apollo Group had little else going for it other than the beat. And that bar was set so low, even the beat wasn’t enough to keep the buyers on the hook. By the end of that day’s trading, the gain had been whittled down to only a 7% advance.

Said another way: The knee-jerk reaction wasn’t a reflection of the market’s true opinion of APOL. Chalk up another one for the “buy first, ask questions later” camp.

To give (some) credit where it’s due, it’s not like Apollo Group has remained oblivious to problems like a shrinking student base, the questionable value of its programs, and some severe publicity problems.

Apollo is taking measures to shrink its way to a more appropriately-sized organization, including cutting 1,000 employees. It’s also closing campuses, planning to shutter 25 locales in the foreseeable future. The company anticipates saving at least $350 million from the effort.

Yet, those actions all smack of desperation rather than innovation, and that means the market is driving Apollo’s destiny rather than the other way around. Generally speaking, that’s not the stuff great investments are made of.

Bottom Line

Apollo could top earnings estimates in every quarter for the rest of its existence, and that still wouldn’t necessarily mean things are looking up. Estimates are just numbers … guesses made by analysts who may or may not have a firm grip on what’s really going on with a company. What investors really need to see here is rising enrollment, increasing income and a successful navigation of its impending probation.

Monday’s pop was nice, but it didn’t take long for the market to realize the company’s still got problems.

Big ones.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. APOL:
  2. puts the organization’s accreditation status in jeopardy:

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