Is Apollo Education Group Flunking Out?

Source: Apollo University of Phoenix.

After reporting revenue and earnings for the second quarter of its 2014 fiscal year on April 1, shares of Apollo Education Group (NASDAQ: APOL  ) fell 6% in after-hours trading. So you have to wonder: Is Apollo still an attractive investment, or should investors consider dropping out of the stock in the same manner students are dropping out of the company's schools?

Apollo did terrible on earnings, and fell short on revenue
For the quarter, Apollo reported revenue of $679.1 million. This represents a 19% drop compared to the $834.4 million from last year and was lower than the $689 million analysts expected. In its earnings release, management attributed the company's poor top-line performance to a significant drop in enrollment numbers.

In its University of Phoenix operations, the company reported that its total enrolled students fell 17%, from 300,800 to 250,300. In addition to being hit by a smaller head count, the company also experienced a decline in its net revenue per degree-seeking student. Compared to the same quarter a year earlier, the company's revenue per student fell 5.5%, from $2,474 to $2,337.

 Company Revenue Expectation Actual Revenue EPS Estimate Actual EPS
Apollo $689 million $679.1 million $0.19 $0.13

Source: Apollo Education.

On top of disappointing investors with its revenue performance, it also fell shy of profitability expectations. For the quarter, Apollo reported earnings per share of $0.13. Although this is higher than the $0.12 the business reported a year earlier, it was far worse than the $0.19 analysts anticipated.

How does Apollo fare against its rivals?
Over the past three years, businesses that focus on for-profit education have taken a hit due to falling enrollments and higher levels of regulation. Apollo has not been immune to this trend. Between 2011 and 2013, the company saw its revenue fall 22%, from $4.7 billion to $3.7 billion.

In terms of profitability, the situation has been even worse. During this time frame, the company saw its net income plummet 57%, from $572.4 million to $248.5 million. This drop in profitability came as a result of falling revenue, but also because of higher expenses in relation to those sales.

For instance, as enrollments fell, the company began offering lower tuition costs in an attempt to slow the outflow of its student body. This resulted in lower margins.

Apollo wasn't the only major for-profit education business to be negatively affected by these issues. Both DeVry Education  (NYSE: DV  ) and Career Education (NASDAQ: CECO  ) were harmed as well. Career Education saw its revenue fall 44%, from $1.9 billion to $1.1 billion. As a smaller company in its field, Career Education's minuscule net income of $18.6 million in 2011 turned into a massive $164.3 million loss.

Source: Career Education.

DeVry's performance was also hurt over the past three years, but not to the extent that Career Education's was. Between 2011 and 2013, the company saw its revenue fall only 9%, from $2.2 billion to $2 billion, which demonstrates that management has cultivated an enterprise less susceptible to student outflow.

Source: DeVry University.

Looking at profits, DeVry's metrics were better than Career Education's but couldn't keep up with Apollo's. Over the same time frame, DeVry's net income dropped a whopping 68%, from $330.4 million to $106.8 million. The disparity between the company's top and bottom lines was mostly attributable to rising costs. These costs were due to the company's growth initiatives and combined with $83.2 million associated with impairment and restructuring charges.

Foolish takeaway
It looks as though Apollo couldn't live up to expectations, but Career Education and DeVry look to be having some difficulties as well. It's hard to tell if any of these companies will deliver the best returns for investors moving forward, but DeVry, with its small drop in sales combined with its drop in profits being attributable to growth initiatives, could be the best prospect.

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