) --

Apollo Group's


adjusted quarterly profit topped expectations, but the stock tumbled Tuesday on a soft student enrollment outlook for the University of Phoenix.

Apollo Group FCO Brian Swartz had cautioned earlier this year that student enrollment at the University of Phoenix will likely decline throughout this year as Apollo's flagship for-profit school permits students to attend preliminary classes before signing up for the courses.

>> Education Stocks: 2011 Outlook

Vote: Which For-Profit Education Stock Will Outperform in 2011?

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.

Despite its earnings beat, Apollo shares tumbled 7.8% to $39.05 at midday Tuesday amid heavy trading. More than 5.4 million shares changed hands less than halfway through the day's session, compared with their average daily volume of just 2 million.

Apollo attributed the student enrollment decline to "operational changes and initiatives it has implemented to more effectively support students and improve educational outcomes, including changes in the manner in which admissions and other employees are evaluated and compensated, the full implementation of University Orientation, and the continued refinement of the Company's marketing approaches to more effectively identify students who have a greater likelihood to succeed in University of Phoenix's educational programs. "

The University Orientation referred to a mandatory three-week implemented on Nov. 1, 2010 for all new students enrolling at University of Phoenix with fewer than 24 transfer credits. The program aimed to help to counter criticisms Apollo and a number of its for-profit education stock peers have faced claiming that the schools saddle their students with debt yet leave them unequipped for the job market and a means with which to repay the hefty loans.

Further pressuring Apollo' stock Tuesday was 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, however, 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.

Vote: Which For-Profit Education Stock Will Outperform in 2011?

For the recent quarter, ended Feb. 28, Apollo booked a net loss of $64 million, or 45 cents loss per share, compared with a year-earlier profit of $92.6 million, or 60 cents per share.

Excluding goodwill charges and other one-time costs totaling $222 million, however, income last quarter was $118.2 million, or 83 cents per share.

By that measure, Apollo beat expectations for earnings of $99.9 million, or 69 cents per share.

Quarterly revenue fell 1.9% to $1.05 billion.

Increased marketing costs paid by Apollo to help attract students worked to pressure Apollo's results last quarter, UBS analyst Ariel Sokol told



"The amount that Apollo pays to put a new student in one of its classrooms has almost doubled over the past year, to about $3,200," the analyst said. "Declining new enrollment and higher marketing costs are both hurting Apollo's net income."

Similar to Apollo, for-profit education peer

Corinthian Colleges


also recently warned of a larger-than-previously forecast decline in new student enrollment.

Corinthian attributed its revised guidance to recently instituted tuition price increases for diploma programs, which went into effect on Feb. 1.

Vote: Which For-Profit Education Stock Will Outperform in 2011?

The operator of Everest, WyoTech and Heald colleges increased its tuition, on average, by 12%to ensure it would remain in compliance with what is known as the 90:10 rule, a regulation that will go into effect in fiscal 2012 and that stipulates that no more than 90% of a for-profit education provider's revenue may be generated from the Department of Education's federal student aid program.

Corinthian now expects new student enrollment growth to decline between 21% and 23% in the third quarter of fiscal 2011, down from its prior estimate for a decline of 15% to 17%.

Student enrollment growth declines will also be a result of Corinthian's discontinuation of enrolling ability-to-benefit (ATB) students, the company said. "ATB student" refers to those applicants who do not already possess a high school diploma. Corinthian stopped admitting those applicants in Sept., 2010 as it worked to improve its cohort default rates.

Excluding the loss of ATB students, Corinthian said new student enrollment growth would decline as much as 7% in the third quarter, compared with its prior guidance of "flat to slightly up."

Corinthian now estimates its average two-year cohort default rate will be between 9% and 12% for the 2010 cohort of students, down from its average preliminary CDR of 21.9% for 2009 and 19% for 2008.

Uncertainty has plagued the for-profit education sector since last summer.

Stocks in the education sector underperformed the

S&P 500


last year for the second consecutive year. Performance in 2011 is expected to remain volatile amid that

regulatory uncertainty.

Vote: Which For-Profit Education Stock Will Outperform in 2011?

The Department of Education is expected to unveil a final version of what is known as the "gainful employment" rule, which would cut federal aid to schools with more than 65% of students unable to repay hefty loans. Federal aid to for-profit education providers came to nearly $150 billion in the last academic year.

RBC Capital Markets analyst Robert C. Wetenhall said he expects the final version "will be comparable to or less onerous than the previously published draft version." Still, he told


recently that it's "tough to get excited about the

education sector's outlook" for 2011 given the lack of a hard catalyst, or "something dramatically material likely to provide torque to the stocks."


Obama administration's proposed education regulations cover everything from restricting incentive-based recruiting practices, the need for new job-training courses, and taking action against schools which fail to advertise honestly to

requiring schools to notify students of graduation and job placement rates. Institutions would also be required to limit student enrollment to those who have high school diplomas or can readily demonstrate their readiness for university-level education. Schools must also comply with what is called the 90:10 rule in fiscal 2012, a rule stipulating that no more than 90% of a for-profit education provider's revenue may be generated from the DOE's federal student aid program.

Bob Phillips, managing partner at

Spectrum Management Group

, told


"the general macro outlook for the sector is not good." He views the education sector as "a bubble fueled by free government money."


analyst Samford suggested investors "stick with the clicks," meaning schools that offer online postsecondary education programs as opposed to more traditional classroom and campus settings. He estimated that nearly a third of all students took at least one course online in 2010. Nearly half of students taking at least one online course, around 3 million, were taking programs exclusively online he said, a number he expects will grow to 5 million by 2015.

Samford also encouraged investors to consider schools with lower-priced programs. Even as the nationwide unemployment figure is expected to drop by 60 basis points this year, "sustained unemployment levels above 9% will continue to offset a complete tailwind reversal" that would normally affect school stocks during a recovery.

Vote: Which For-Profit Education Stock Will Outperform in 2011?

School stock peer

Bridgepoint Education

(BPI) - Get Report

beat fourth-quarter profit expectations and said it expects student enrollment to grow nearly 6% this year despite all the new regulations.

>> Bridgepoint Beats, Enrollment Grows

Bridgepoint said the impact of regulatory changes scheduled to take effect during the year as well as internal quality initiatives it introduced in 2010 will pressure the postsecondary education provider, particularly in the second half of 2011, yet it expects positive full-year new enrollment growth.

Bridgepoint's total student enrollment jumped more than 45% to 77,892 in 2010, compared with 2009, and Bridgepoint anticipates its student roster will grow to between 81,000 and 82,500 in 2011. Combined new student enrollments last quarter at its academic institutions were 15,600, up from 10,600 in the year-earlier period.

Capella Education

(CPLA) - Get Report

recently posted weaker-than-expected fourth-quarter earnings, announced layoffs and forecast a sharp drop in new student enrollment.

In addressing the uncertain environment, Capella said it plans to reduce its non-faculty workforce by around 8%, or 125 positions, resulting in a charge of about $2 million in the quarter ending March 31, 2011 and an annualized cost savings of approximately $12 to $12.5 million.

New enrollment growth dropped 10.7% year-over-year in the fourth quarter and Capella forecast new student enrollment to decline in the current quarter by 35% year-over-year.

Capella's layoffs and new student enrollment forecast echoed that of

Corinthian Colleges


, which recently beat top- and bottom-line expectations for its 2011 fiscal second quarter but forecast slower student enrollment growth and said it plans to raise tuition fees and trim its workforce.

Vote: Which For-Profit Education Stock Will Outperform in 2011?

Corinthian said its total student population grew 13.3% year-over-year to 105,498, as of Dec. 31, but that on a

pro forma basis, including the Heald student population, the company's total student roster decreased 0.5%. Corinthian completed its acquisition of Heald Capital, the parent company of Heald College, in January of 2010.

Total new students decreased 8% to 26,831. On a pro forma basis, new student growth declined 17.7%.

The company said it plans to cut 4% of its workforce in the current quarter, or around 672 workers, and expects the layoffs to result in annualized savings of $60 million.



topped Wall Street's quarterly expectations in January with higher profits and revenue despite a decline in new student enrollment at its namesake university.

DeVry University's new undergraduate enrollment decreased 4.7% and total undergraduate enrollment rose 14.9% in the fall.

School stock peer

ITT Educational Services

(ESI) - Get Report

topped Wall Street's expectations in its recently reported quarters.

Capella Education shares fell 1.8% to $48.86 on Tuesday, Bridgepoint lost 2.6% to $16.79, DeVry shed 1.7% to $53.98, and ITT tumbled 5.1% to $67.09.

-- Written by Miriam Marcus Reimer in New York.

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