The Sun Shines on Apollo Group

Last week, Apollo Group (APOL - commentary - Cramer's Take) appeared on Zacks.com's list of strong buys. This is noteworthy, because according to Zacks, companies in its top-ranked list have produced an average annual return of 34% since 1980. In 2002, the list gained 18.7%, while the S&P 500 fell 23%.

Apollo is a Phoenix-based firm that has been educating working adults for more than 25 years. Through its many subsidiaries, including the University of Phoenix Online (UOPX - commentary - Cramer's Take), the Institute for Professional Development, the College for Financial Planning, Western International University and Apollo Learning Group, Apollo teaches 165,000 students at 65 campuses and 111 learning centers in 37 states, Puerto Rico and British Columbia.

For the fiscal year that ended in August 2002, the company earned $153 million on sales of $1 billion. Apollo's earnings for this year are forecast at $204 million.

Authentic Earnings Power

As the quality of profits chart below shows, Apollo's robust growth in accrual profits (net income) is matched stride for stride by gains in defensive and enterprising profits. Thus, Apollo is able to self-fund and create value -- an impressive feat, considering that revenue has grown an average of 29% a year for the last five years. This is a company that's profitable the way both commercial bankers and venture capitalists think about profits.

What's more, as we see below, Apollo is in the Earnings Power Box and moving in an upper-right direction, what I call a Staircase company. For the long-term cautiously greedy investor, Staircases are the best companies to own, provided, of course, the valuation is reasonable and you believe the firm's competitive position is secure. I look at Apollo's chart and think it may grow earnings in the way Microsoft (MSFT - commentary - Cramer's Take) and Paychex (PAYX - commentary - Cramer's Take) have.

The Croesus Test

Still, there are limiting factors. For one thing, insiders are selling. Also, according to Zacks, of 14 brokers surveyed, seven have a strong buy, five have a moderate buy, one has a hold, and one has a strong sell. Unfortunately, the broker with the strong sell wasn't identified, but I'd like to talk to him or her. As Herb Greenberg advises, whenever you see a lone analyst, that's a tell.

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Hewitt Heiserman has been a financial analyst for 15 years and has worked for Fidelity Investments, Simplex Time Recorder, American Holdco and Breakaway Solutions. He is now writing a book on the Earnings Power Box, an analytical model he created to gauge the quality of a firm's profits. (The Earnings Power Box is a trademark of Hewitt Heiserman.) At the time of publication, Heiserman had no positions in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback and invites you to send it to [e-mail].