For most students, the school year only started back up fairly recently. But at for-profit educator Apollo Group
What analysts say:
- Buy, sell, or waffle? Seventeen analysts study Apollo. Eight each give it buy and hold ratings, and only one says sell.
- Revenues. On average, analysts expect to see revenues rise 12% to $701.1 million.
- Earnings. Profits are predicted to rise in tandem, up 11% to $0.60 per share.
What management says:
I don't know if it was the biggest news out of Apollo this quarter, but it was certainly the weirdest. In August, the nation's leading provider of for-profit educational services bought ... an unprofitable online advertising company. Yes, you read that right. In August, Apollo agreed to buy tiny Aptimus
What management does:
You can see the reason for Apollo's focus on marketing reflected in the table below. Gross margins have been sliding for more than a year, dragging operating and net margins down with them. In fact, operating margins -- where the effects of advertising costs are most evident -- have fallen much faster and much farther than gross margins.
2/06 |
5/06 |
8/06 |
11/06 |
2/07 |
5/07 |
|
---|---|---|---|---|---|---|
Gross |
57.1% |
56.3% |
55.1% |
54.6% |
53.9% |
53.9% |
Operating |
31.5% |
30.2% |
28.1% |
26.5% |
23.8% |
23.2% |
Net |
18.9% |
18.4% |
16.7% |
15.9% |
14.9% |
14.5% |
One Fool says:
Why is that? Probably because advertising eats up such a large portion of Apollo's budget. Take last quarter, for example. Advertising-related costs comprised 78% out of the quarter's $209 million budget dedicated to selling, general, and administrative expenses -- a whopping $162 million, and climbing. Year over year, Apollo grew its revenues at a respectable 12% clip last quarter. However, advertising costs grew half again as fast -- up 18%. If buying Aptimus can rein in those costs even a bit, it could be well worth the $48 million outlay.
Side note: Out of curiosity, I took a stroll through the income statements of a few of Apollo's peer for-profit educators to see whether they're spending similarly large sums on marketing. Turns out, many of them are in even worse straits than Apollo. Whereas the giant of the industry, with perhaps the best name recognition, got away with spending 22.1% of its revenues on marketing last quarter, smaller Corinthian Colleges
Which of these things is not like the others? One of the companies named above sits just below the level of a formal recommendation on the Watch List at Motley Fool Hidden Gems. To find out who gets the A- from Fool co-founder Tom Gardner, click here and sneak a peek at the teacher's manual.