American Public is hoping for more graduates to cross its stage. Image: American Public Education.

For-profit schools have had a very rough five years. As far back as 2011, however, I singled out American Public Education (NASDAQ:APEI) as one of the few bright spots in an industry rife with misaligned incentives.

Because the company focused on military students, had lower-than-average default rates, and offered classes for far less than other companies, I believed that American Public might actually make a good investment.

But even American Public has stumbled on tough times, with the stock having lost half of its value since last February. Based on earnings that the company released this week, I don't see things improving any time soon.

American Public Education results: Just the numbers

Expected Revenue

Actual Revenue

Expected EPS

Actual EPS

$78.2 million

$76.3 million



Sources: E*Trade, SEC filings.

Owners in American Public stock might cheer the fact that earnings came in ahead of expectations, even if there was a miss on revenue.

But it's important to note that revenue was down 10% from the same time last year, and earnings dropped even more -- roughly 20%.

Management's midpoint guidance for the fourth quarter is non-GAAP earnings of $0.54 per share on revenue of $84 million. For comparison, analysts are expecting the same level of earnings on $85.5 million.

What happened with American Public this quarter?
No matter what, however, the big, important numbers for American Public still aren't moving in the right direction:

  • Net course registrations at the American Public University system fell 6% from the same time last year.
  • Overall student enrollment was down even more, shrinking 11% year over year.
  • More critically, net course registrations by new students -- which really show the direction that the school is going -- were down significantly. At the American Public University System, they were down 19%, an acceleration from earlier in the year.
  • The company's much smaller subsidiary, the Hondros School of Nursing, also reported that new student enrollment was down 5%.

What management had to say
The precipitous drop in new student enrollment is what investors should be focused on. In the company's previous conference call, management signaled that it expected new student enrollments to fall between 19% and 23%. Looked at in this light, you could actually argue that the quarter wasn't that disappointing.

In the earnings release, management stated, "The decline in total net course registrations by new students was primarily the result of a 35% year-over-year decline in net course registrations by new students who use Federal Student Aid (FSA) as their primary funding source." 

Management is stuck in a no-win situation. For much of its existence, American Public relied on Military Tuition Assistance for active personal and Veterans Affairs benefits to help students pay for tuition.

But a few years back, they realized that they needed to diversify their income base, and started trying to attract non-military students. These students often use FSA to help pay for school -- so a 35% decline in net course registrations by new students who use FSA clearly signals that this effort isn't going as well as planned.

Looking forward
One might look at the company's non-GAAP guidance and think the stock should hold its ground, given how close the forecast is to what analysts are hoping for. But it's important to note that GAAP earnings are expected to come in much lower, at a midpoint of $0.43. The difference is due to the company's having taken a hit for "employee redeployment and the writedown of information technology assets ."

That's not great news, either, as it shows that management wasted money on IT assets and is having a tough time allocating its workforce with smaller enrollment numbers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.