Tough Times To Continue for Apollo and For-Profit Educators (APOL, DV, ESI, STRA)

If there is a sector under fire after insurance and banking, it is for-profit education.  Shares of the for-profit universities and for-profit continuing education companies have seen their stock prices gutted.  After today’s close came earnings from Apollo Group, Inc. (NASDAQ: APOL), but more important than earnings was the changes that the company is making and how it continues to see the future.  Investors and traders alike are looking keenly at DeVry, Inc. (NYSE: DV), ITT Educational Services Inc. (NYSE: ESI), and Strayer Education Inc. (NASDAQ: STRA) as a result.

Apollo said the non-GAAP earnings would have come to $193.9 million or $1.31 EPS versus $171.3 million or $1.10 EPS versus the same quarter in 2009.  Revenue rose over 17% from last year to $1.2594 billion, which was amplified by 6.3% growth in its University of Phoenix total degreed enrollment to 470,800.  Also cited was an increase of $20.5 million in net revenue from BPP Holdings that it acquired in 2009.  Thomson Reuters estimates were $1.30 EPS and $1.26 billion.

The company has worked on strategic initiatives for the next year that are geared to “enhance the student experience, expand student protections and ensure that we enroll students who we believe have a greater likelihood to succeed in our programs.”  Strategic initiatives are generally good, but not in this case for Apollo shareholders.  Apollo’s  release pretty much says it all: “These initiatives will present new challenges for the company in the year ahead, but they are the right things to do for our students and they will better position us to succeed as an organization over the longer term.”

The company is trying to offer a bit of an olive branch to regulatory bodies and lawmakers.  “We agree with the stated goal of the Department of Education and of Congress to ensure that students in the post-secondary education system receive a quality education at a good value. We have taken and intend to continue to take a leadership role within the proprietary sector by providing students with a good value for their educational investment while employing marketing practices that fully and fairly inform our students about the educational options available to them, as well as the costs and potential benefits of an education.”

Income from continuing operations came to $47.5 million or $0.32 EPS, down from $97.2 million or $0.62 EPS from the same quarter a year ago.  Results contain special items that include goodwill and other intangible asset impairment charges of $175.9 million for the BPP subsidiary and a $0.9 million charge representing an accrual for incremental post-judgment interest related to a securities class action lawsuit, and more.

Here is the problem outside of operations.  Apollo’s scrutiny because of its operations and its sector is taking a toll.  The company is now withdrawing guidance ahead, which means that the company can only play the guessing game about what its revenues and income will be.   It seems more students will be heading to community colleges rather than online for-profit education destinations.

Instructional costs and services increased by $104.0 million, or 23.4% to $547.7 million and that translates to an increase of 220 basis points to 43.5%.  Selling and promotional expenses increased by $40.9 million, or 15.7%, to $301.6 million but that fell by 40 basis points to 23.9% of revenues due to higher revenues.  General and administrative expenses rose $2.7 million, or 3.1%, to $91.0 million, a decline of 100 basis points to 7.2%.

Apollo shares fell by almost 1% to $49.50 in regular trading, but the stock is down 10.6% at $44.22 in the after-hours session.  Its 52-week trading range is $38.39 to $76.86.  With a $7+ billion market cap before he drop, you can imagine that Apollo’s drop is taking a toll elsewhere.  Key competitors are taking it on the chin in the after-hours session as well.

DeVry, Inc. (NYSE: DV) closed down 0.77% at $50.57 on the day.  The stock is off more than 5% at $47.88 in the after-hours session and the 52-week trading range is $36.34 to $74.30.

ITT Educational Services Inc. (NYSE: ESI) closed down 1.4% at $65.92 today.  The stock is off more than 8% at $60.50 in the after-hours session and the 52-week trading range is $50.00 to $121.98.

Strayer Education Inc. (NASDAQ: STRA) actually closed up by 0.24% at $157.05 today.  The stock is off more than 5.4% at $148.50 in the after-hours session and the 52-week trading range is $139.96 to $262.44.

The for-profit education sector had risen in hopes that some of the problems were going to pass.  It turns out that changes from inside from the company’s making concessions of their own will be compounded upon those changes coming from Washington D.C.

JON C. OGG