Education kingpin Apollo Group (NASDAQ:APOL), the clear leader of the pack among for-profit educators in both sales and market cap, took an arrow to its stock price last week. Let's see whether the injury was mortal or "just a flesh wound."
Apollo reported its fiscal Q4 and full-year results Wednesday morning, and by day's end the stock had lost 23% of its value, and another 2% as the trading week closed. Hitting the highlights:
- Revenues were up 5.5% for the quarter, and 10% for the year. As one might expect now that the former head of University of Phoenix Online is running the whole show, high-margin revenue from UOP accounted for more and more of the total sales base as the year went on.
- Yet profits were down 12% for the quarter, and 7% on a per-share basis, thanks to an 8.4-million-share reduction in share count.
- For the year, the profit trends were down 2% firmwide, and up 4% per share.
New president Brian Mueller noted that the firm has been focusing on improving marketing and student retention this year, and that while the marketing situation is in hand, student retention still needs work. While I agree with the latter admission, I differ with the former.
With undergrad enrollment having fallen 9% in 12 months, clearly, retention strategies still need work. As far as marketing goes, Apollo today boasts just 5% more total students than it had a year ago, even though it increased advertising spending by 13%. That's more than twice as fast as sales grew in the quarter. (For the year, too, marketing costs rose faster than the sales they're supposed to create.)
Adding litigation risk to injury, Apollo further confirmed that its investigation into past stock options "backdating" at the firm has revealed "various deficiencies." Not sure what that means? Ask a shareholder of CNET (NASDAQ:CNET), Bed Bath & Beyond (NASDAQ:BBBY), Vitesse Semiconductor (VTSS.PK), or Apple. I'm sure they can explain the concept to you.
Did you say "arrow" or "harpoon?"
It was a pretty miserable earnings report all around, no doubt. But as an inveterate value-hunter, I have to ask whether the stock's abrupt fall from grace is presenting us with a most Foolish bargain here. Here's my thinking:
Free cash flow dropped to $435.4 million from $461.9 million this year -- down 6%. Although that's not exactly the direction I'd prefer to see it heading, when you weigh those cash profits against the firm's $5.8 billion enterprise value ($6.3 billion market cap, minus $550 million in cash, restricted cash, and long- and short-term marketable securities), you come up with an enterprise value-to-free cash flow ratio of roughly 13. That's lower than the growth rate analysts are still projecting for the company. Meanwhile, its return on equity stands at an incredible 63%. Either way, it's enough for me to give Apollo a pass on a test that most everyone else seems to think it has failed.
Revisit happier days at Apollo Group in our interview with former CEO Todd Nelson.
CNET is a Motley Fool Rule Breakers pick, while Bed Bath & Beyond made the cut at both our Stock Advisor and Inside Value newsletters. Try any of our Foolish newsletters free for 30 days.
Fool contributor Rich Smith does not own shares of any company named above.
