Earnings Estimate Scorecard: Apollo Group (APOL)

Apollo Group Inc. (APOL), one of the world’s largest private education providers, reported third quarter of fiscal 2010 earnings per share of $1.74, increasing at a growth rate of 34%. The result topped the year-ago earnings of $1.30 per share and also surpassed the Zacks Consensus Estimate of $1.55.

Quarterly Review

In the third quarter, Apollo earned $264.6 million from continuing operations, an increase of $58.2 million from the year-ago quarter. Including a goodwill impairment charge of $8.7 million, a pre-tax charge of approximately $132.6 million related to a securities class action lawsuit and discontinued operations of $2.0 million, net income plummeted $21.8 million to $179.3 million. On a reported basis, including one-time items, earnings came in at $1.18 compared with $1.26 in the prior-year quarter.

Apollo delivered total revenue of $1,337.4 million during the quarter, up 27.7% from the year-ago quarter. Results hiked on the back of a 3.3% increase in enrollment to 476,500 students in the University of Phoenix, coupled with $75.8 million in net revenue from BPP Holdings.

Instructional costs and services increased to $540.6 million during the quarter from $390.6 million in the year-ago quarter, primarily due to the acquisition of BPP, as BPP’s cost structure is more skewed towards instructional costs and services, and higher bad debt expenses.

Operating profit for the quarter under review decreased 12.3% to $302.3 million. However, excluding goodwill impairment and litigation charges, operating profit increased 28.7% to $443.6 million.

Apollo expects total revenue for fiscal 2010 at $1.25 billion. For 2011, it expects revenue to grow in the high-single digit range. Apollo now sees earnings per share for the fourth quarter of fiscal 2010 at $1.30.

For a full coverage on third quarter earnings, read: Apollo Group Earnings Surge

Agreement of Analysts

Estimate revision trends depict a positive sentiment among analysts for the upcoming fiscal year 2010. Over the last 7 days, 14 of the 21 analysts covering the stock have revised their estimates upward, while only 1 has moved in the opposite direction. However, 2011 follows a just opposite trend in which 14 of the 22 analysts covering the stock have lowered their estimates while none moved their estimate upward, which portrays negative sentiment of analysts.

A similar trend is being notice for the next two quarters. For the fourth quarter, 12 out of 15 analysts have revised their estimates upwards while only 1 analyst expects earnings per share to go down. For the first quarter of fiscal 2011, 8 out of 13 analysts have lowered their estimates, while nobody moved in the opposite direction.

Magnitude of Estimate Revisions

Analysts have an optimistic outlook for both fourth quarter and fiscal 2010. Over the last 7 days, the estimate for fourth quarter has increased by 7 cents, while for fiscal 2010 it increased by 17 cents. However, the estimates for first quarter and fiscal 2011 have decreased by 6 cents and 19 cents, respectively.

Our Recommendation

Apollo’s dominating market position, quality growth approach and new management should help the company in the future, aided by its focus on higher-margin and lower-default students. Its strong fundamentals lead to healthy cash flows and profitability. With a lower exposure to regulatory issues than many of its peers, the company has the ability to more easily handle regulatory changes.

The University of Phoenix has planned to roll out an Orientation Program in which it will require all students who enter the for-profit institution with less than 24 hours of college credit to participate in a free, three-week program aimed at ensuring that students are ready for college-level work. These efforts over the long-term will reduce bad debt expense and will position the company for more stable cash-flow growth. However, this will hamper the near-term operating metrics, as the company continues to take the upfront marketing and instructional spend for those students.

However, Apollo carries risks related to accreditation, local regulations, and currency exposure as it is committed to international expansion. Our short-term recommendation on the stock is ‘Hold,’ while we are ‘Neutral’ on the stock in the long term.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

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Zacks Investment Research is one of the most highly regarded firms in the investment industry. In 1978 Zacks originated the concept of utilizing earnings estimates revisions to make profitable investment decisions. Zacks offers multiple investment products and services to help investors achieve superior returns.

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