On Tuesday, January 7, 2014 Apollo Education Group (NASDAQ:APOL) is due to report its earnings for the first quarter of its 2014 fiscal year. Over the past few years, for-profit education companies have been suffering at the hand of greater regulation and lower enrollments. Apollo has been no exception, but is it possible that now might be the beginning of a turnaround for the company, making it an attractive opportunity? Or would it be wiser to stay away, or perhaps to even consider taking a stake in a competitor like ITT Educational Services (NYSE:ESI), Career Education Corporation (NASDAQ:CECO) or DeVry Education (NYSE:DV)?
Mr. Market has low expectations
For the quarter, Mr. Market doesn't seem to be expecting too much from the company. Revenue is expected to fall by a whopping 18.8% to $860.6 million, down from the $1.06 billion that the company brought in during the same quarter last year. Although this may come as a shock, the company expects a large decline in sales throughout its 2014 fiscal year. According to management, revenue for the year should come in between $2.95 billion and $3.05 billion; this would amount to a 17.1% to 19.9% drop compared to its 2013 fiscal year.
Looking at the company's bottom line, Mr. Market expects similar results. If analysts are accurate, earnings per share for the for-profit school should come in at $0.90. Compare this to the $1.22 that the company earned in the first quarter of last year. This represents a 26.2% drop and is primarily due to lower revenue and higher costs relative to sales.
Apollo has had a hard time lately
The past few years have not been particularly kind to Apollo. Due to a combination of greater federal regulation, lower enrollment rates, and the competition that has stemmed from it, the company's sales have fallen off a cliff. Between 2010 and 2013, the company's revenue has dropped 25.3% from $4.93 billion to $3.68 billion.
Because of the inherent problem of controlling costs that comes with declining sales, the company's net income has fared even worse. Over the same timeframe, net income at Apollo has fallen 55.1% from $553 million to $248.5 million. The largest contributor to the disparity between revenue and net income was the company's cost of revenue, which rose from 35.2% of sales in 2010 to 42.9% in 2013.
It's not alone!
If Apollo were the only company in its industry suffering declining revenue and profitability then that would likely imply financial and operational mismanagement or low quality services. However, the entire for-profit sector has been harmed over the past few years.
ITT, for instance, saw its revenue fall over the past three fiscal years from $1.6 billion to $1.3 billion, a decline of 19.4%. Career Education has performed even worse, with revenue falling 28% from $2.07 billion to $1.49 billion.
Looking at net income, ITT and Career Education have experienced a similar decline. Over the past three years, ITT's net income fell by 62.5% from $374.2 million to $140.5 million. As with revenue, Career Education's results were even worse. Over the same timeframe, the company's net income of $157.8 million turned into a net loss of $142.8 million.
Year-to-date, the situation at both of these companies has been far from ideal. In the third quarter of 2013, revenue at ITT dropped 17.6% from $314.7 million to $259.4 million while net income dropped 55.9% from $42.9 million to $18.9 million. Not failing to disappoint, Career Education's metrics also look miserable. In the third quarter of 2013, the company's revenue fell by 20.5% from $316.2 million to $251.3 million while its net loss widened from $33.1 million last year to $87.1 million this year.
Looking at these numbers, you might just write off for-profit schools entirely. However, there is one company with results that have been impressive when stacked against its peers. DeVry, one of the larger players in the industry, actually saw its revenue rise by 2.6% over the past four years. Between 2010 and 2013, revenue at the school rose from $1.92 billion to $1.96 billion. Analyzing the numbers a bit closer, however, you'll see that sales have been dropping since 2011. During this timeframe, revenue fell 9.1%.
Despite looking slightly better than its peers on the top line, net income at the school falls more in line with the industry norm. Between 2010 and 2013, the company's net income experienced a drop of 61.8% from $279.9 million to $106.8 million. Year-to-date, things have continued to deteriorate. In the first quarter of the company's 2014 fiscal year, revenue fell 6% from $479.9 million to $450.9 million while net income fell from $32 million to a loss of $7.1 million.
Analyzing the available data, we seem to be coming to one unfortunate conclusion: for-profit education companies are continuing to slide. While it is possible that each of these is a contrarian play, investors should proceed with caution if they decide to make an investment. For those of you who believe that these businesses will turn around, however, there is one valuable metric that can be used in your favor: book value.
In the case of Apollo, if we remove the value of its goodwill and other intangible assets and adjust for treasury shares, the company's book value comes out to $41.54. This represents a rather substantial margin of safety when considering the company's recent $27 share price and is especially appealing when you realize that it has $1.52 billion (or $13.42 per share) in cash. In the event that business turns around, it wouldn't be unreasonable to expect a dramatic run-up in share price. With the risks involved, however, investors may want to consider waiting for earnings to come in next Tuesday so that a better picture of the company's current situation can be painted.
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