Foolish Forecast: Apollo Group's Q3 Report Card

School's out for the summer, but a for-profit educator's work is never done. Apollo Group (Nasdaq: APOL  ) reports fiscal Q3 2006 earning tomorrow morning.

What analysts say:

• Buy, sell, or waffle? Nineteen analysts study Apollo. Five grade the stock a buy, 13 a hold, and one a sell.
• Revenues. Analysts expect to see revenues rise 7% in tomorrow's news, to $663.4 million.
• Earnings. Profits are predicted to fall 4% to $0.73 per share.

What management says:
The biggest news in the papers these days is also the biggest news at Apollo: stock option backdating. Or, investors hope, the absence thereof. In response to a report by Lehman Brothers (NYSE: LEH  ) suggesting that Apollo Group had backdated some of the stock options it issued from 2000 to 2004, Apollo issued a press release on June 9 that -- surprise! -- denied the allegation. But just to be safe, the company's board of directors will hire an outside firm to review the conclusions of Apollo's internal investigation. Let's hope the outside investigation gives Apollo the all-clear, too. If not, Philip Durell may feel compelled to write Apollo a strongly-worded letter.

What management does:
Apollo's doing pretty well on the profitability front, with rolling operating and net margins higher now than they were a year ago, although gross margins are a bit lower. The lower gross is due to the cost of goods sold, which has been rising faster than revenues (18% vs. 15% in the last six months). The company's emphasis on bringing associate degree students into its online "Axia College of Western International University" is one of several initiatives that new Apollo President Brian Mueller has been emphasizing in recent months.

Margins %	11/04	2/05	5/05	8/05	11/05	2/06
Gross	57.9	58.2	58.4	58.4	58.3	57.9
Op.	31.4	31.6	32.3	32.5	32.7	31.9
Net	15.8	15.8	16.5	19.8	19.9	19.1

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In reviewing Apollo's last quarterly report, my fellow Fool Stephen Simpson looked a bit askance at Apollo's rise in associate degree students, and falling bachelor's and master's degree numbers. It's not uncommon for Fools to disagree on these kinds of things, and that's the case here, too.

From my point of view, the online education that Apollo specializes in still carries a stigma among potential students, who often view traditional, four-year colleges as the only "real colleges." To break down these mental barriers, Apollo should definitely get students started in whatever programs it can convince them to try. If "entry level" programs prove valuable to the students, the bachelor's and master's enrollment numbers will ultimately take care of themselves.

Competitors:

• Career Education (Nasdaq: CECO  )
• Corinthian Colleges (Nasdaq: COCO  )
• DeVry (NYSE: DV  )
• ITT Educational Services (NYSE: ESI  )
• Strayer (Nasdaq: STRA  )

Want to know more about Apollo Group? Get the inside scoop from former CEO Todd Nelson. Read our interview with him here.

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Fool contributor Rich Smith does not own shares of any company named above.