10/24/2013
By David Urani

As the market probes new all-time high,s there remain a handful of industries that haven’t quite made it out of the woods yet, and the for-profit educational stocks are one of them. The story has been one of increased demand for degrees during the recession declining as the economy recovered. That’s been exacerbated by general questions about how valuable their degrees are, as regulators have questioned whether their education is up to standards. Given results from Apollo Group (APOL), operator of University of Phoenix Online, and ITT Educational (ESI) this week, there are signs of a light at the end of the tunnel, although the industry remains quite difficult.

 Apollo Group (APOL)

The company’s fiscal Q4 beat by $0.30 with EPS of $0.055 while revenue was down 15% to $845 million versus the $824 million consensus. The bottom line turned in a big improvement and upside surprise, while the top line was better than expected although still quite weak.

• University of Phoenix total enrollment -18% to 269k
• New enrollment -22% to 41k
• Operating margin (adjusted) 7.5% from 9.0%
• Guides FY14 revenue $2.95-3.05 billion vs $3.22 billion consensus; operating income $375-450 million.
• During the quarter received reaffirmed accreditation for U Phoenix and Western International for 10 years

In terms of sales and enrollments, the results still looked rough although perhaps less bad than it could have been. In the meantime, FY14 revenue guidance doesn’t really support any kind of turnaround as it’s below consensus and 18.5% below FY13 at the midpoint. The story behind this earnings beat and stock surge was resutructuring, with the company now approximately 2/3 of the way through closures of U of Phoenix locations. Thus, the cost structure is now becoming more aligned with the soft demand.

The company has also addressed rising concern from students over affordability; it has lowered pricing and also offered new scholarship programs. Management sees more price drops next year, with revenue per student expected to be down another 2-4%. As far as the outlook on new enrollments, management remains cautious but also notes it’s hard to forecast; they see ‘less-bad’ declines in Q1.

ITT Educational Services (ESI)

ESI’s Q3 beat by $0.24 with EPS of $0.80 while revenue was down 17.6% to $259 million versus the $251 million consensus.

• New enrollment +5.2% to 20,307
• Total enrollment -7.1% to 60,997
• Revenue per student -7.2%
• Operating margin to 12.4% from 22.5%
• Raises FY13 EPS guidance to $4.00-4.20 vs. $3.80 consensus.

Like APOL, ITT turned in a much better than feared bottom line, while revenues continued to languish. However, whereas Apollo’s new enrollments remained in the dumps ITT showed a 5.2% increase. That said, its new enrollments were +7.5% in Q2.

In a record-high territory market like this, some of the few remaining areas of ‘value’ remain the turnaround industries like these education stocks. Obviously, the turnaround stories come with their risks. With respect to APOL and ESI the potential for profit improvement remains apparent. However, if you ask me, I’m still not entirely convinced enrollments and revenues are back on track. There’s a reduced desperation for degrees and jobs these days, and in particular, the value of getting a degree from one of these places still has its questions, especially when everyone knows student debt is stacking up. In both ESI’s and APOL’s cases, there’s clearly been a need to lower prices to lure in that demand.

David Urani
Wall Street Strategies

Add a Comment!