3 Things University of Phoenix Can Do to Ace the Next Review

News of a Department of Education review made investors flee from University of Phoenix's parent, Apollo Group, Inc. What can Apollo do the next time to avoid another drop in its stock?

Jul 22, 2014 at 5:53PM

This month, Apollo Education Group's (NASDAQ:APOL)

While it may be too late to limit some immediate damage to Apollo's stock price, there are three things it can do to mitigate the impact of future government reviews.

No. 1: Don't ignore the regulators
This seems like obvious advice: take the regulator's review seriously. Recently, the DOE and other regulators have been investigating for-profit schools regarding their marketing; coursework and grades; and dropout, graduation and employment rates of students. Given that most for-profit schools get a majority of their revenues from U.S. federal funds, schools should take any regulatory review or investigation seriously, no matter how routine.

However, one of UOP's competitors chose otherwise, which led to its collapse.

Earlier this year, the DOE initiated an investigation involving Corinthian Colleges Inc. (NASDAQ:COCOQ). The DOE investigated allegations of altered grades and the school misleading the public regarding job-placement rates. The DOE sent five letters requesting data and documents from the school. Corinthian failed to adequately respond to any of the letters. The DOE responded to the school by delaying federal aid. Federal aid accounts for 80% of Corinthian's annual revenue. The delay in aid resulted in a cash crunch for the school. This financial crisis lead to Corinthian selling or closing nearly all of its campuses.

The UOP will need to pay attention to the DOE review. According to its October 2013 annual report, UOP gets 90% of its revenue from federal aid. Any interruption due to review noncompliance could be fatal, as in the case of Corinthian.

No. 2: Get better students and graduates
Better applicants and students in the beginning will result in better and more employable graduates. This strategy will help minimize the scrutiny of U.S. regulators. This is the path that Grand Canyon University (NASDAQ:LOPE) and Bridgepoint Education (NYSE:BPI) have taken.

Grand Canyon has been executing this strategy with better students at enrollment to better graduates. CEO Brian Mueller said its incoming graduates have a GPA of 3.5, and 90% of non-graduating fall students come back to Grand Canyon in the spring. 75% of its premed graduates get into graduate program, compared to the nationwide average of 42%. 90% of Grand Canyon business graduates have secured jobs within six months of graduation.

Bridgepoint is not as far along as Grand Canyon, but Bridgepoint has seen some promising signs. According to its first-quarter 2014 report, applications to the school grew 11% compared to the same period last year. With more applicants, Bridgepoint has the opportunity to be more selective with new enrollments. Furthermore, a growing number of Bridgepoint students enrolled are sticking with their studies. Bridgepoint's 12-month student retention improved up 64.5% compared to 61.6% retention in the same period last year.

No. 3: Seek International Opportunities
One way to limit the financial exposure to U.S. government regulators is to open outside of the U.S. Apollo is already engaged in this strategy, as is DeVry Education Group (NYSE:DV).

DeVry has been expanding its schools into Brazil. DeVry Brasil's new student enrollment in the March 2014 term increased 19.7 % to 8,845 compared to 7,390 in the prior year. Total Brazil student enrollment increased 13.5% to 33,013 students compared to 29,083 last year. DeVry Brasil received approval to offer nine new degree programs from the Ministry of Education. All of this growth has also made an impact on its financials as DeVry Brasil's revenue grew 15% over the previous year.

Apollo has expanded its operations into two new continents during fiscal 2014: Australia in the first quarter and Africa in the second. This establishes Apollo operations on six of the seven continents. Apollo's Australian online and training market is growing nearly 20% annually. It just entered South Africa with the acquisition of Milpark Education, a South African education provider. Apollo CEO Greg Cappelli reports that Apollo Global has a revenue run rate close to $400 million and that global operations will be operating at positive cash flow in the next 12-18 months.

While Apollo has near-global operations, its international revenues are just a fraction of its overall finances. In 2013, Apollo's international operations generated $275 million in revenue compared to UOP's revenue of $3.3 billion. International revenues will need to become a larger percentage of the overall revenue for Apollo before it can serve as an effective hedge against negative U.S. regulatory actions.

Final thoughts
The DOE's review the UOP has spooked investors. However, there are three strategies Apollo can execute to limit the regulator's impact for future reviews. If it can take the review seriously, find better students and graduates, and continue to expand to international markets, Apollo should expect a passing grade next time around.

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Johnny Chen has no position in any stocks mentioned. The Motley Fool owns shares of Bridgepoint Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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