What Investors Should Know About Apollo Education
For-profit educators have been very tough investments to love. Poor financial performance and general distaste for the industry have most investors steering clear. One of the biggest players, Apollo Education Group , has yet to show long-term promise. The company behind the well-known University of Phoenix brand is seeing double-digit drops in sales and, more important, enrollment. There are industry trends afoot that threaten the very business model of University of Phoenix's largely Web-based education platform. For all of this troubling news, investors are paying a growth-oriented 17 times forward earnings for the stock. Why?
In the year-ago fiscal second quarter, Apollo brought in $834 million in sales. This year, that number was just under $680 million -- a near-20% drop and well under analyst estimates. Sure, the economy is still on shaky ground (especially for the lower-earning demographic that Apollo targets), but it's disconcerting nonetheless to see enrollments plummet 17%. Even student-level profitability fell 5.5%.
Operating income and profits took their respective hits as well, but the big concern here is that fewer people are signing up.
Why it's happening
It's not that Web-based education isn't popular -- it's a fast-growing phenomenon that has the ability to reach many, many more people around the world for a lower price than traditional higher-education institutions.
The for-profit educator businesses have taken a long-term hit from about as many sources as possible -- decreased demand, deteriorating consumer sentiment, increased regulation, and technological disruption. While not all have been hit as hard as Apollo, the industry at large is facing a steep uphill battle.
One big trend hurting the business involves prestigious institutions such as Harvard and Stanford offering MOOCs -- massive online open courses. MOOCs are free and provide a truly revolutionary education opportunity for a global audience. They are not as structured as something that the University of Phoenix may provide, but, then again, they are offered at the right price and the teaching material comes from the world's leading educator minds.
Online education has been democratized, and for-profit players simply don't offer enough to fight back. A MOOC is not currently a replacement for a traditional degree, though the long-term implications are still threatening. As a greater population receives education through MOOCs, the workforce will reflect it and job requisites could shift as well. MOOCs can already earn students college credit.
While the two have yet to be compared too closely, as the free option gains attention, the other is increasingly imperiled.
Priced to sell
If the business were selling at fire-sale prices, Apollo's brand value and substantial platform might be enough to justify an investment. But it's not at all an appealingly priced business. At nearly 17 times forward earnings, investors are paying big-time for a company with declining financials. EV/EBITDA is a much more attractive basis for investment at roughly four times, which reflects the strength of Apollo's balance sheet -- roughly $40 million in debt and $800 million in cash and short-term securities.
If the company were generating substantial free cash flow, its lean balance sheet would spell attractive returns for investors, but that just doesn't appear to be happening. Without much visibility as to how the company will move forward in these conditions, investors would be wise to wait.
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The article What Investors Should Know About Apollo Education originally appeared on Fool.com.Michael Lewis has no position in any stocks mentioned, and neither does The Motley Fool. 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.
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