Apollo Education Slows the Purge, but Industry Headwinds Remain Strong

Apollo Education (NASDAQ: APOL  ) spent much of 2013 in flux. The business of on-campus and online for-profit education is a highly controversial one, with many believing that these institutions should be less concerned with generating returns and more focused on getting their students degrees and, most important, jobs. As a result, Apollo and its for-profit educator brethren have dropped precipitously from their high-flying days to cautiously low-valued growth stocks. Apollo ended 2013 on a high note, and released its earnings for the just-ended quarter on Tuesday. Here's what investors need to know.

Headwinds
Before recapping the quarter's numbers, it's worth mentioning that Apollo still faces an uphill battle to achieve its growth initiatives. While competitors like Grand Canyon Education claim the campus/Web model as the key to a competitive advantage, the rapid growth of MOOCs  -- massive open online courses -- is a substantial threat to the for-profit business model.

For one thing, MOOCs are largely free to students and there is little to no application process. If you want to gain a functioning education in programming or communications, you can find an MOOC that suits you. Many times, these course offerings are partnered with top-tier institutions such as Stanford and Yale. That brand power will forever outweigh a degree from Grand Canyon or Apollo's University of Phoenix.

The capital-intensive hybrid model faces intense disruption in light of these recent developments in distance learning.

Earnings show resilience
The market was well aware that Apollo Education's first-quarter profit would be lower than in the year-ago quarter, but the numbers actually came in better than expected. Excluding onetimers, the company earned $1.04 per share -- $0.14 ahead of analyst expectations. It's not that more people signed up at the University of Phoenix -- enrollment dropped nearly 18% -- but that the cost of teaching dropped enough to mitigate the downward attendance trend.

Looking ahead, demand is improving. Management raised guidance for both sales and profit. The company now expects $3 billion to $3.1 billion, up from $2.95 billion to $3.05 billion. Operating income is set to come in between $400 million and $450 million, narrowed from the earlier $375 million to $450 million.

Apollo's management has navigated the changing tides of the industry with varying degrees of success, but even that is a notable achievement given the uphill battle the for-profit education business has fought. With ongoing regulatory uncertainty and technological disruption, the industry is not attractive at the moment. Apollo's cost management should keep things steady in the short run, but investors need to keep a close eye on the macro-level changes that, at some point, will overrun operating efficiency efforts. 

Study up on these three stocks
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2787855, ~/Articles/ArticleHandler.aspx, 10/25/2014 2:27:37 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement