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Education Stocks: 2011 Outlook

Apollo Group

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Apollo Group (APOL)

Return in 2010: -34.8%, compared with group average return of -14.5% and S&P 500 return of 12.8%

Consensus Expectations for Net Fiscal 2011 Earnings: $4.58 per share, or $670.5 million, compared with fiscal 2010 profits of $3.62 per share, or $553 million

Revenue Expectations for Fiscal 2011: $4.68 billion, compared with fiscal 2010 revenue of $4.93 billion

Fall 2010 Enrollment Market Share: 22%, or 440,000

Average Tuition: $21,900 for Associates, $66,196 for Bachelors and $27,318 for Graduates

Samford noted that Apollo, along with DeVry (DV) and Corinthian Colleges (COCO), offers relatively high tuition rates, presenting a competitive disadvantage to lower-priced peers like American Public Education (APEI) and Bridgepoint Education (BPI), when schools face regulatory hurdles.

Apollo's investment in a University Orientation program should help position the company well by the time the gainful employment rules take effect, Samford said. Apollo's orientation program is a free, three-week, non-credit bearing program that was made mandatory as of Nov. 1 for all new students enrolling at University of Phoenix with fewer than 24 transfer credits.

RBC's Wetenhall recently reiterated a sector perform rating on Apollo shares, lowering his price target by $5 to $40, noting that questions about enrollment growth will "limit enthusiasm" for the stock "until greater clarity emerges." He pointed out that management teams at Apollo were largely net sellers of the company's shares on the open market last year which "potentially suggests a lack of strong conviction in enrollment and earnings growth for the sector in the coming quarters."

Spectrum Management's Phillips said that Apollo has "the hardest time sustaining historical revenue increases" and is "heavily reliant on government aid for their students," leading him to suggest investors avoid the stock.

Apollo Group beat fiscal-first quarter profit and revenue expectations , driven largely by tuition price increases at Apollo's flagship University of Phoenix.

Wetenhall noted that "investors are starting to give Apollo credit for improving the quality of its business model, but remain cautious due to poor enrollment visibility."

Degreed enrollment at University of Phoenix declined 3.8% year-over-year. Lower enrollment was attributed to changes in the way admissions personnel were compensated for acquiring and registering students. New student enrollment at University of Phoenix fell 42% in Apollo's first quarter, a sharp reversal from growth of 14% in the year-earlier period. "Because of a large decline in new enrollments, coupled with the graduation of some of our existing student population, we expect increasing declines in total enrollment as we move through the year," CFO Brian Swartz said on a conference call with investors.

On Oct. 14, 2010 Apollo warned that enrollment would be down more than 40% in fiscal 2011's first and second quarters . Apollo withdrew its outlook and warned that it would fall out of compliance with the so-called 90:10 rule in fiscal 2012.

On March 29, 2011 Apollo's fiscal second-quarter adjusted quarterly profit topped expectations , but the company offered a soft student enrollment outlook for the University of Phoenix.

University of Phoenix degreed student enrollment decreased 11.6% to 405,300 in the recent fiscal second-quarter, compared with year-earlier results, primarily due to a 44.9% decrease in new degreed enrollment year-over-year.

Apollo also offered a weaker-than-expected long-term outlook.

Apollo forecast fiscal 2011 revenue in a range of $4.65 to $4.75 billion, with operating income, excluding the impact of special items, in the range of $1.15 to $1.20 billion.

For 2012, Apollo said net revenue would be in the range of $4 to $4.25 billion, with operating income, excluding the impact of special items, in the range of $675 to $800 million. Analysts' consensus was for 2012 revenue to come in at $4.51 billion with adjusted operating income of $1.03 billion.


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