APOL Apollo Education Grp., Inc.

Apollo Group Inc. (APOL), one of the world's largest private education providers, is scheduled to report its third-quarter financial results after the close of market on June 30, 2011. The current Zacks Consensus Estimate for the quarter is earnings of $1.34 a share. For the quarter under review, revenue is $1,202.0 million, according to the Zacks Consensus Estimate.

Second-Quarter 2011, Summary

Apollo Group's posted earnings of 83 cents per share for the second-quarter of fiscal 2011 declined 1.2% from the prior-period earnings. However, quarterly earnings surpassed the Zacks Consensus Estimate of 69 cents a share.

Apollo delivered total revenue of $1,048.6 million during the quarter, down 2.0% from the year-ago quarter attributable to lower enrollments partially offset by selective tuition price increases and better student retention rates. University of Phoenix Degreed Enrolment dropped 11.6% to 405,300 primarily due to a fall of 44.9% in New Degreed Enrollment. Additionally, BPP Holdings recorded a $6.4 million drop in net revenue attributable to lower student enrolment coupled with a negative impact of foreign exchange rate. BPP Holdings, a U.K. based provider of education and training to legal and finance professionals, was acquired by Apollo Global in July 2009. Total revenue also surpassed the Zacks Consensus Estimate of $1,027 million.

Management Guidance

The company expects net revenue in the range of $4.65–$4.75 billion in fiscal 2011 and operating income in a $1.15–$1.20 billion band. For fiscal 2012, net revenue is expected to be in the range of $4 billion to $4.25 billion and operating income to come in between $675 million and $800 million.

Third-Quarter 2011 Zacks Consensus

The analyst covered by Zacks expects Apollo to post earnings of $1.34 a share for the third quarter of fiscal 2011 faring worse than earnings of $1.74 delivered in the prior-year quarter. The current Zacks Consensus Estimate ranges between earnings of $1.18 and $1.42 a share. The current Zacks Consensus Estimate has improved by a penny over the last 30 days.

With respect to earnings surprises, Apollo has topped the Zacks Consensus Estimate over the last four quarters in the range of 1.55% to 20.74%. The average remained at 13.71%. This suggests that Apollo has beaten the Zacks Consensus Estimate by an average of 13.71% in the trailing four quarters.

Our View

Post-secondary enrollments are expected to grow due to population growth, a shift in the U.S. economy from manufacturing to service and increasing wage gap between people with post-secondary degree and those with only a high school diploma. Enrollments in online programs are increasing more rapidly than campus-based programs, as students look to balance school with work and personal obligations. With 102 campuses and 154 learning centers in the U.S., Apollo is well positioned to continue to grow both its online and campus operations.

Moreover, Apollo Group is the industry leader in the U.S. private education services sector. The company has a strong experience of more than 35 years in the education industry and possesses one of the most powerful brands, University of Phoenix, in the sector. This provides a hard-to-replicate competitive advantage to the company and bolsters its leading position in the market.

However, Apollo Group derives a significant portion of its revenues from federal student financial aid programs, referred to as Title IV programs, which requires accreditation from an accrediting body recognized by the U.S. Department of Education. Apollo Group's growth potential will be adversely affected if it fails to consistently meet the stringent criteria used by the authorities and consequently lose accreditation.

Besides, Apollo Group faces intense competition from other companies offering post-secondary education, such as DeVry Inc. (DV), Strayer Education Inc. (STRA), and ITT Educational Services Inc. (ESI). In addition, the company also competes with community colleges and traditional universities. Consequently, this may dent the company's future operating performance.

Currently, Apollo maintains a Zacks #4 Rank, which translates into a short-term 'Sell' rating. Moreover, our long-term recommendation on the stock is 'Neutral'.

 
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