American Public (APEI) Downgraded

We expect American Public Education Inc. (APEI) to Underperform with a target price of $22.00. Earlier, we had a Neutral recommendation on the stock.

The online provider of higher education, focused primarily on serving the military and public service communities, recently pointed that it is witnessing a drop in enrollment of military students, and as a result it rolled back its fiscal 2010 guidance of 35% to 38% rise in net course registrations and a 36% to 39% jump in both revenues and net income.

The company fears that the increase in military operations in the U.S., and the deployment of military personnel in remote areas with limited accessibility to the Internet, may have resulted in the sluggish growth in total net course registrations and revenue. However, the company hinted that in order to offset the slow paced military enrollment it will focus more on civilian students presently.

Another current potential risk hovering over the education sector is the regulations that have been proposed by the Department of Education.

Recently, the Department of Education proposed that an educational program could only qualify for Title IV funds if it helps in achieving gainful employment, complying with the loan repayment rate and debt-to-income ratios. The institutions are under scanner due to the rise in the default rate of student loans, and are also now being asked to submit information relating to recruitment procedures and the use of student’s grant.

The company derives a significant portion of its revenues from tuition assistance programs of the U.S. Armed Forces and federal student financial aid programs, referred to as Title IV programs, and is subject to stringent regulation by the Department of Education and accrediting agencies recognized by the Secretary of Education. American Public Education’s revenue growth potential will be adversely affected if it consistently fails to meet the stringent criteria set by the authorities and consequently lose accreditation.

We prefer to have an Underperform rating on the stock at this juncture. Our Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating, also correlates with our long-term recommendation.

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