Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of American Public Education (NASDAQ:APEI) fell as much as 10% on Wednesday after Deutsche Bank downgraded them from "buy" to "hold" in a report published today. The broker also reduced its price target to $32 from $37 (the stock was trading just below $28 at 12:45 p.m. EDT.)
So what: The following excerpt from Deutsche Bank's report highlights its rationale for the downgrade:
Signs of stabilizing military enrollment trends have yet to surface while weak civilian student registration growth is expected to face further headwinds over the remainder of 2015.
Margin pressure from ongoing IT investments and marketing spend will likely be exacerbated by the failed attempt to bring Fin Aid processing in-house. We lower 1Q15E EPS from $0.53 to $0.50 (Street $0.50), and '15E drops by 11% from $2.54 to $2.27 (Street $2.14). We continue to like APEI's low cost, high quality offering, but poor enrollment visibility and lower margin are moving us to downgrade shares to a Hold rating.
Note that, prior to this report, Deutsche Bank's first-quarter earnings per share estimate of $0.53 was the highest estimate among the six analysts that follow the stock, according to the Thomson Financial Network. The same held for full-year earnings: At $2.54, Deutsche Bank was the high estimate. As such, today's report simply brings Deutsche Bank closer in line with the consensus -- which is why it's a bit puzzling to see a stock price reaction of this magnitude.
Bear in mind, however, that this is a small-cap stock with relatively low volume: The average daily turnover is on the order of $3 million. It doesn't take a lot of money changing hands to move this stock.
Now what: Long-term shareholders will want to consider the issues Deutsche Bank raises inasmuch as they relate to an analysis of the quality of American Public Education's franchise and its intrinsic value. However, upgrades/ downgrades and price target changes in and of themselves contain essentially zero information that is relevant to the long-term investor. The analysts' time horizon is simply too short. Furthermore, though I'm not a fan of the for-profit education sector, I'm forced to admit that, at less than 9 times cash flow, per research firm Morningstar, the stock price appears to contain a margin of safety -- in a market in which that is becoming a very rare property.