Keep Apollo Group's Pop in Perspective
"Wow," I thought. "Apollo is up 25% today; they must have stopped the enrollment bleeding at the University of Phoenix."
I've been following for-profit educators for years, and watched the industry get hammered over and over again. The only way, I thought, for such a huge jump in the share price to happen would be for enrollment to have finally bottomed out and have begun showing stability.
Alas, I was wrong. Below, we'll cover the real reason Apollo is up by so much today, and why investors still need to be cautious with the largest operator in this industry.
Far surpassing expectations
Large moves when earnings are released is largely an expectations game. If a company does poorly compared to the previous year, it's not that important if it is already expected. The lowered expectations, they say, are already "baked into the price" of the stock.
That helps explain why, even though revenue came in 15% lower than last year, shares were up significantly today. Take a look at what analysts were expecting, and what the company actually reported.
Earnings per Share
No matter the underlying fundamentals, you'd be very hard-pressed to find a company whose stock didn't pop after earnings came in 120% higher than analysts were expecting. Throw on top of that the fact that 21% of shares are sold short, and you have the perfect storm to reward Apollo shareholders quickly.
The secret behind Apollo's surprise has to do with cost-cutting in two major categories: instruction and admissions advisory. While revenue might have fallen 15%, Apollo was able to cut spending in these two departments by 19% and 31%, respectively. The cut in instruction was particularly important, as it accounted for roughly half of all expenses last year.
Time to jump in?
But there are two very important things that investors have to consider before jumping in and buying shares of this company.
The first is the simple fact that cuts in instruction and admissions -- while they were probably necessary -- also cut down on the value proposition Apollo has to offer. With fewer teachers, Apollo may not be able to differentiate itself that much from cheaper online alternatives offered by traditional schools. And with fewer admissions advisors, the company may have a difficult time recruiting students.
Furthermore, enrollment trends continue to consistently head downward. Take a look at enrollment numbers for Apollo during the fourth quarter of the past four years.
Though the overall enrollment numbers are larger, it's the new student enrollments that investors really need to keep an eye on. They let you know what direction the schools are headed in. With a 22% decline in new student enrollment in the past year, things don't seem to be slowing down much.
Though Apollo may be an easy target for critics, this is a trend seen at many of the other large for-profit colleges in the United States. Take a look at new-student enrollment figures from other major players like Corinthian Colleges , DeVry , and Bridgepoint Education .
DeVry has closely mimicked Apollo's decline, while Coronthian suffered dramatic falls as the Department of Education began to crack down on for-profit practices. Bridgepoint, on the other hand, saw precipitous falls as problems surfaced with accreditation organizations (which have since been resolved).
While the cost-cutting moves by Apollo have served investors well today, there's no denying the overall trend. Enrollment numbers continue to drop at Apollo, DeVry, and Bridgepoint. Until these numbers begin to stabilize, it's hard to tell if the industry has hit a bottom.
Investments for a global economic recovery
In fact, some think the global economic recovery is hurting for-profit educators as potential students are joining the ranks of the employed. If you'd like to benefit, instead of suffer, from this trend, you should check out a recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," which outlines three companies that could take off when the global economy gains steam. Click here to read the full report!
The article Keep Apollo Group's Pop in Perspective originally appeared on Fool.com.Fool contributor Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of Bridgepoint Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.