Apollo Rebounds on Expectations Beat

(Apollo Group earnings report updated with analyst commentary and quotes from the company's conference call .)
PHOENIX (TheStreet) -- Apollo Group (APOL) shares soared Tuesday thanks to an earnings beat posted late Monday.

Apollo shares jumped 13.4% to close at $40.74 on Tuesday. The stock had fallen sharply in Monday's trading session after sector peer Strayer Education ( STRA) said student enrollment in its programs fell by double-digit percentages.

Apollo Group, the parent company of University of Phoenix and other for-profit postsecondary education programs, posted fiscal-first quarter profits of $235.4 million, or $1.61 per share, down 2% from year-earlier earnings of $240.1 million, or 1.54 per share.

Despite the profit decline, Apollo handily beat expectations for earnings of $1.35 per share, or $197.7 million.

Revenue came in at $1.33 billion, up 5.4% from year-earlier revenue of $1.26 billion, driven largely by tuition price increases at Apollo's flagship University of Phoenix. Top-line results also beat expectations. Analysts' consensus call had been for revenue of $1.26 billion.

"Outlook for most of these companies in the space still remains murky," said Stern Agee & Leach analyst Arvind Bhatia.

Height Analytics analyst Jarrel Price said "we are encouraged that the cost of positioning the company for future success is not worse than expected given industry trends."

"We do not think yesterday's first-quarter announcement indicated a meaningful acceleration in Apollo's recovery," he added.

RBC Capital Markets analyst Robert Wetenhall said 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 to 438,100, though average enrollment during the quarter increased slightly, helping to boost Apollo's revenue.

Lower enrollment was attributed to changes in the way admissions personnel were compensated for acquiring and registering students. Commission-based recruiting practices at for-profit colleges has been a largely criticized practice by the Obama administration and others seeking regulatory reform in the sector.

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.

"We would expect the year-over-year decline in new degreed enrollment in the second quarter to be about the same as the first quarter," CFO Brian Swartz said on a conference call with investors.

"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," Swartz said.

The company added that it does not expect materially unfavorable findings from the Department of Education's review of the education sector that began in December of last year, looking into for-profit school programs funded with federal aid.

Monday's intraday declines across the education sector came after Strayer Education said late Friday that new student enrollments across its campus and online education system decreased by 20% for the 2011 winter term, which began Jan. 3, even as continuing student enrollments increased by 10%.

That led Piper Jaffray analyst Peter P. Appert to slash his price target on Strayer shares by $17 to $119, maintaining a neutral rating on the stock.

Despite Apollo's drop in students starts, it could be better positioned relative to its education peers because the decline followed changes in the company's internal regulation. Strayer, meanwhile, saw a drop in student enrollment because of external factors beyond its control.

"While the company and industry are going through a transition, Apollo may be ahead of the curve based on its initiatives -- however painful they may be to near-term results," noted BMO Capital Markets analyst Jeff Silber.

Strayer's enrollment update dragged much of the education sector sharply lower in Monday's trading but many industry players rebounded somewhat in Tuesday's session.

Everest Colleges parent Corinthian Colleges ( COCO) closed higher by 1.5%. DeVry ( DV) gained 4.7%, Lincoln Educational Services ( LINC) 1.3% and ITT Educational Services ( ESI) jumped 7.4%. Grand Canyon Education ( LOPE) closed the day unchanged at $18.05.

Strayer remained in negative territory, closing down 0.2%. Capella Education ( CPLA) was down 1.4%.

A number of schools in the education sector have also offered cautionary statements about falling student enrollment growth in recent months.

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 sector selloff and was echoed by school stock peers such as Corinthian Colleges, Capella Education and 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.

As education companies face stricter rules, many have been adjusting their operating practices, limiting enrollment to more qualified students and those more likely to be able to repay loans.

"Things seem to be decelerating for them faster than expected," said Sterne Agee & Leach analyst Arvind Bhatia. The analyst also said macroeconomic trends have driven the decline in student starts.

-- Written by Miriam Marcus Reimer in New York.

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