The past year has been tough for the for-profit education stocks. But last Thursday, there was some relief. The Department of Education announced the final rules regarding performance requirements for students. Essentially, they were not severe – and should allow for some flexibility regarding federal loan availability.
As a result, there was a big rally. Just look at Apollo Group (NASDAQ:APOL) — its stock price was up about 11%.
But is this just a short-term bump, or is there an opportunity for strong gains?
Let’s take a look at the pros and cons for Apollo:
Pros
Brand. Reputation and performance are critical elements when students look for an institution to attend. As for Apollo, it certainly has a well-regarded platform with its University of Phoenix division.
It provides programs for undergraduate, master’s and doctoral degrees. There is also a robust online system for distance learning.
Cost advantages. Apollo does not have to deal with certain kinds of expenses of traditional schools — sports teams, food service, and dorms. Because of this, Apollo has been able to generate attractive profit margins.
Consolidation. The new Department of Education regulations are likely to make it tougher for smaller operators. But this is good news for Apollo. Essentially, it can buy some of them, perhaps for lower valuations. And Apollo has lots of resources to pull off deals.
Cons
Regulation. Despite its recent moves, the DOE will continue to be vigilant. And over time, there may still be more onerous rules. It’s a risk that the industry will always have to contend with.
Growth. Since its founding in the early 1970s, Apollo has been a standout growth company. But now its revenue size is roughly $5 billion. In other words, investors should not expect hefty growth rates in the future – at least on an organic basis.
Advertising. It’s not cheap getting new enrollments. It means spending heavy amounts on TV, radio and online advertising. In fact, with the large number of competitors, there has been intense bidding pressure on ad rates.
Verdict
A big drag on the U.S. economy has been the persistently high unemployment. A key reason for this has been the lack of sufficient skills in the workforce. Of course, this is a huge opportunity for companies like Apollo.
What’s more, the valuation of the company is quite reasonable. The price-earnings ratio is roughly 17 and the company has $1.5 billion in cash.
While growth may get tougher – because of Apollo’s size – there should still be opportunities to acquire rivals. When looking at these factors, the pros outweigh the cons for the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
