Why Arithmetic Is Fun at Apollo Group

Shares of for-profit educator Apollo Group (Nasdaq: APOL  ) enjoyed a bit of "grade inflation" on Tuesday -- 10% worth -- in response to an A+ earnings report for fiscal 2007.

Now, I know that all the financial media reporting on the news are focusing on the fourth-quarter numbers. But you only get one shot per year at reviewing a company's fiscal year results. Plus, we're trying to give you a bit of additional perspective here, of the long-term variety. So the numbers I'll be discussing today refer to the fiscal year. Specifically:

  • Apollo's fiscal 2007 revenue increased 10% over fiscal 2006.
  • Average enrollment likewise grew 10%.
  • Free cash flow (defined here as operating cash flow minus capital expenditures and monies spent in the "purchase of land and buildings related to new headquarters") tracked the rate of sales and enrollment growth. At $485.9 million for the year, it grew 10%.
  • Net profits were down 1.5%, but Apollo's weighted average diluted share count also declined 1.5% because of stock buybacks. Result: flat earnings per share of $2.35.

Apollo did not give quarterly or annual guidance in its report. However, two facts suggest to me that the good news will continue in fiscal 2008. First, Apollo joined a string of companies -- stretching from Analog Devices (NYSE: ADI  ) to Best Buy (NYSE: BBY  ) to Symantec (Nasdaq: SYMC  ) to United Technologies (NYSE: UTX  ) -- that all bought back shares last year. "The company repurchased approximately 7 million shares" in Q4. Second, this repurchase program was renewed for another $500 million earlier this month (enough to buy nearly 7 million more shares).

Concentrated profits
What we're seeing here is the opposite of stock dilution. The more shares Apollo buys back, the fewer pieces into which it must slice its net profit "pie." (I call this concept "stock concentration.")

So far, so obvious. Less obvious is this: When Apollo calculated its per-share profits for fiscal 2007, it did not divide net profit by the number of shares actually outstanding on Aug. 31, 2007. Rather, it divided net profit by the weighted average number of shares outstanding over the course of the year -- 173.3 million -- which does not accurately reflect the current share count.

If Apollo had 173.3 million shares outstanding at the end of fiscal Q3, and bought back 7 million shares in Q4, then its actual share count was 4% lower (and its per-share profits roughly 4% higher) than reported. As time progresses, and the weighted average more and more reflects the true number of shares outstanding, you can expect reported per-share profits to rise. The more so with Apollo having reloaded its buyback shotgun, and ready to blast away additional shares in fiscal 2008.

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