was the subject of some favorable broker action this week.
Apollo Group, the parent company of University of Phoenix and other
for-profit postsecondary education providers, saw its shares upgraded this week to market perform, from a rating of underperform, by analysts at FBR Capital Markets.
Analyst Matt Snowling upgraded Apollo but maintained a $40 price target. The action reverses Snowling's October move when he downgraded Apollo to underperform, reducing his price target to $40 from $49.
In a note to investors, Snowling said the October downgrade had been based on "meaningful headwinds
that would likely persist for the company and broader industry over the next several years, impeding enrollment, revenue, and earnings growth."
On Oct. 14
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. The rule 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. Apollo would have to increase its tuition rates if access to federal aid is cut off, further inhibiting student enrollment.
The warning led a sharp sell-off in education stocks and was later echoed by school stock peers such as
Everest Colleges parent
ITT Educational Services
. The sector selloff that week was the latest blow to education stocks after the Obama administration announced June 16 that it would seek regulations aimed at stanching
for-profit schools' high rate of student-loan defaults and curbing their aggressive marketing practices.
Stocks in the for-profit education sector had a rough 2010.
Regulatory uncertainty weighed on the industry, criticism about colleges' graduation rates and student loan repayment rates abounded, future enrollment figures were called into question,
schools were accused of failing to adequately prepare students for profitable careers yet leave them saddled with heavy debt and federally proposed restrictions on the industry's business operations cast a shadow no bull market could fully offset.
"Given the recent underperformance in the stock and overall peer group, we believe much of that overhang is largely priced into APOL shares at this point," noted FBR's Snowling. "In addition, we believe management is now taking the right steps to reposition itself in the new regulatory environment through cost-cutting measures and a focus on higher-quality students."
"Make no mistake -- we continue to have a negative bias on the group due to regulatory and budgetary constraints, but we also believe that Apollo's strong brand and steady cash flow and earnings generation should provide support to the shares at current levels," Snowling added.
The analyst lowered his fiscal 2011 and 2012 earnings expectations for Apollo to $4.74 and $3.71, respectively, from $5.31 and $4.09. He also set a fiscal 2013 EPS estimate of $3.43.
Wall Street's consensus call is for fiscal 2011 EPS of $4.39, 2012 EPS of $4.59 and 2013 EPS of $5.45.
Apollo Group shares added 1.2% Thursday to close at $38.40.
-- Written by Miriam Marcus Reimer in New York.
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