And Who Says For-Profit Schools Don't Pay Off?


A couple weeks ago, shares of Arizona-based Apollo Group soared more than 24.5% on news that the company easily topped analyst expectations for the quarter. According to the company's press release, earnings per share came in at $0.55 (though its diluted earnings, inclusive of special charges, came out to $0.19 per share), 120% higher than the $0.25 the market expected. Although this marks a significant win for the company, it is a notable decrease from the $0.67 it reported during the same quarter a year ago.

In addition to beating analyst expectations on the bottom line, the company outperformed on the top line. For the quarter, the company earned revenue of $845 million which was about 2.7% higher than the $823.1 million the market expected. Though its revenue was better than anticipated, it fell far short of the $996.5 million that it achieved in the same quarter a year ago.

Revenue will fall more... a LOT more!
When looking at the company's quarterly report, we can see that the primary reason why it has seen less revenue and net income this year was an 18.1% decline in its University of Phoenix Degreed Enrollment. Additionally, its New Degreed Enrollment experienced a 22.3% decline from last year.

For the year, Apollo saw total revenue of $3.7 billion which was a roughly 14% decline from the $4.3 billion it brought in last year. Even though this may be disappointing, that's still far larger than the $1.49 billion that Career Education Corporation , the $1.6 billion that Corinthian Colleges , or the $1.29 billion that ITT Education Services raked in during their most recent fiscal years. Moving forward, the company expects to continue to see a challenging environment in the industry as fewer consumers enroll in its programs and the threat of current and further government regulation takes hold. This is best illustrated by looking at Apollo's 2014 fiscal revenue forecast of $2.95 to $3.05 billion, which would be a 17.6% to 20.3% haircut.

In an effort to help offset this expected decline in revenue and net income, the company hopes to achieve significant cost reduction through restructuring efforts in the amount of $300 million which, when combined with this year's efforts, should total around $650 million. After the implementation of these initiatives, the company believes that its operating income (not inclusive of the actual cost of restructuring) will be somewhere in the range of $375 to $450 million. This too is a large haircut from its 2013 operating income (after adding back restructuring expenses and removing its litigation credit for the sake of comparability) of $601.4 million.

How does Apollo match up to its peers?
In this article so far, we've looked at how Apollo's numbers have been recently and what they're likely to be in its next fiscal year. We've also taken the time to look briefly at three of its peers in terms of size and have come to the conclusion that Apollo is larger, by far, than each. However, just because the company is larger does not mean that it is a better prospective investment. To determine which company is the most attractive, I decided to look at the revenue growth (or lack thereof) from each.

By considering each company's revenue growth or shrinkage, we can actually discern, with reasonable certainty, how well it handled the broader industry downturn. (i.e. which company is more immune/adaptable) This could show the market power and service quality of each entity.

Source: Company Filings

In the graph above, I compiled the revenue for each company and compared it over time. Essentially, I converted each company's revenue in 2008 to $1,000 (to act as the base) and tracked how well each company has performed since then. Because only Corinthian Colleges and Apollo Group have reported their 2013 numbers, both Career Education and ITT end in their 2012 fiscal years.

According to the graph, we see that each company performed really well in terms of revenue growth up through 2010. Corinthian Colleges had the greatest performance and Career Education had the worst. However, due to fewer enrollments and some changes in government regulation, all four dropped precipitously through 2012. Apollo Group continued to decline (with further declines expected going forward). The only exception to this is Corinthian Colleges which saw its revenue fall very little, followed by a small incline in its 2013 fiscal year. The underlying reason here is that it was able to increase its costs by 3.7% while only experiencing a 3.3% decline in enrollments.

Foolish takeaway
Apollo Group reported earnings and revenue that handily exceeded expectations. However, it appears as though it (and probably the rest of the industry) will likely continue to experience declining prospects in the foreseeable future. The only exception appears (at least thus far) to be Corinthian Colleges, which has shown a strong capacity to handle adverse industry changes. It is because of this that I would highly encourage investors to look further into Corinthian Colleges to see whether or not it offers the Foolish investor more bang for their buck.

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