Apollo Deserves Laurels

For-profit educator Apollo Group (Nasdaq: APOL  ) scored an A+ on its recently reported fiscal second-quarter report card. Revenues spiked 34%, and earnings never came close to seeing the wrong side of a bell curve. They just surged -- 50% over the year-ago quarter.

While the company's Apollo Education Group earned its place on the honor roll with a 48% increase in earnings, it was nonetheless outshone by the University of Phoenix Online (Nasdaq: UOPX  ) subsidiary, which rushed ahead of its slower classmate to post a 77% increase.

Nor was last quarter's performance an anomaly. A look at the company's numbers from the last six months reveal almost exactly the same growth rates for both divisions over the entire first half of fiscal 2004.

Lest anyone suggest the company is "only" GAAP-profitable, Apollo's free cash flow numbers were respectable as well. While the company did not release a cash flow statement, it did provide cash from operations numbers ($91.1 million) and capital expenditure numbers ($30.7 million). From these two, I calculate free cash flow of approximately $60.4 million, versus $58.2 million a year ago.

So in the fourth quarter, free cash flow did not accelerate at quite the feverish pace that the GAAP results would suggest (just a relatively sedate 3.7% increase). However, it should be noted that Apollo generated 24% more cash from operations this quarter than last, and spent double the amount on capital expenditures.

And if we take the longer-term view, when comparing the first six months of fiscal 2004 to the first six months of 2003, it turns out that Apollo's FCF increase was actually a much more impressive 38.3%. Slower than the 50% rate of the GAAP earnings increase -- but still a grade worth writing home about.

All in all, you have to hand it to Apollo. It is doing its very best to disprove the thesis well argued by Fool David Forrest earlier this month that for-profit educators like Apollo and its competitors Corinthian College (Nasdaq: COCO  ) , Sylvan Learning Systems (Nasdaq: SLVN  ) , Strayer Education (Nasdaq: STRA  ) , DeVry (NYSE: DV  ) , and ITT Educational Services (NYSE: ESI  ) have to start slacking off the growth soon.

Currently valued at 40 times its run rate of free cash flow, Apollo would be richly valued if it were not growing at its current pace. If it hits the brakes as David is predicting, you are going to hear a screech -- from anguished Apollo Group investors.

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Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article. The Motley Fool has a disclosure policy .