Apollo Group (APOL) has seen stock appreciation of 34% over the past month. At the same time, DeVry (ATGE 0.36%) and Education Management Corporation (NASDAQ: EDMC) have appreciated 22% and 65%, respectively. Since we're in a raging bull market, these types of moves have potential to continue. During bull markets, headwinds are brushed aside and momentum rules the day. However, nothing goes up forever. Therefore, you're going to want to invest in underlying businesses that can withstand broader market drops and create long-term value for your portfolio. Let's see if any of these three companies offers such potential.
Apollo is down for the count
Fiscal year 2013 didn't bring much reason for optimism for Apollo Group. Consider the following numbers versus FY 2012:
- Net Revenue $3.7 billion (FY 2013) vs. $4.3 billion (FY 2012)
- University of Phoenix Average Degree Enrollment: Down 15.6% to 301,000
- Aggregate New Degree Enrollment: Down 20.2% to 172,900
- Earnings-Per-Share: $2.19 (excluding special items $3.16) vs. $3.22
The enrollment decline at University of Phoenix is especially important because University of Phoenix represents 90% of the company's revenue. Apollo Group cites a highly competitive industry, macroeconomic constraints, and pricing pressure for its lackluster performance. What's concerning is that these trends aren't likely to suddenly reverse themselves. Apollo Group's best potential might be via international expansion, which currently includes the United Kingdom, Mexico, Chile, and India.
Looking ahead, Apollo Group expects FY 2014 revenue of $2.95 billion-$3.05 billion. That's a big drop considering FY 2013 revenue came in close to $3.7 billion.
Apollo Group is working hard to offer more value to students through scholarships and discounts, but this isn't good news for investors. Additionally, Apollo Group is aiming to restructure its curriculum so it will match students' workforce goals. To cut costs, Apollo Group is in the process of closing 115 ground locations (leaving it with 111 ground locations), and it looks to streamline and automate its services which will lead to workforce reductions of 500 non-faculty personnel.
Perhaps DeVry or Education Management Corporation offers a better investment opportunity.
Moving campuses
DeVry's first quarter net sales dropped 6% to $450.9 million year over year. The company is dealing with higher operating expenses due to restructuring charges. However, hope exists. Thanks to strong demand for medical doctors and veterinarians, DeVry's health care revenue grew 11% to $175.9 million. Partially thanks to its Falcon Physician Reviews acquisition, International Business revenue jumped 18.3% to $43.7 million. Revenue also increased 15% at Chamberlain, Ross, Becker, and DeVry Basil. However, DeVry is still responsible for half of the company's revenue. Growth is expected at all of its institutions except DeVry.
Total post-secondary enrollment declined 4.4% for the quarter. DeVry cited macroeconomic conditions and a lack of student confidence. The latter pertains to potential students weighing whether or not a higher education is worth paying for. DeVry is focused on strict cost control as costs increase -- not a great combination with declining demand.
As far as Education Management Corporation, it offers a lot of diversification to students through its Art Institutes with culinary, media, interior design, fashion design, and game design programs. While diversification is a plus, it doesn't mean much if a company is incapable of delivering on both the top and bottom lines.
Education Management Corporation has been in the red over the last two fiscal years and in three out of the last four quarters. As far as top-line growth, take a look at how all three aforementioned companies performed over the past several years:
APOL Revenue (TTM) data by YCharts
Avoiding enrollment
Right now, investors in these three companies are rejoicing. Considering underlying trends, this party seems to have stretched a little bit too long. In today's economy, potential students are seriously contemplating avoiding college. They don't want to be in debt for years to come. If the three education providers above offer discounts, this doesn't favor investors. It's a lose/lose situation. Their shares might continue to run higher, but these are far from the safest investments the broader market has to offer.
