Apollo Education Slows the Purge, but Industry Headwinds Remain Strong

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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.

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. 

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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