Apollo Group Gets Graded on the Curve

All but the brightest students have had the queasy feeling of waiting for an unwelcome report card. Short of intercepting the letter carrier, the best tactic was managing expectations.

Apollo Group Inc., which operates the University of Phoenix and other higher-education programs, did just that late last month. The company admitted enrollment growth faltered in its fiscal second quarter ended in February, for which it will report results Monday.

That was troubling since the November period was the first quarter in six to register any enrollment growth at all. Apollo's projection of a flat to low-single-digit increase for enrollment in the most recent quarter led analysts to cut earnings forecasts by 12% to 38 cents, down from 83 cents a year earlier.

Just as mom and dad might be convinced there are worse things than a C+, Apollo's shares have priced in the bad news. They have underperformed the S&P 500 by 31% this year. That, though, actually makes Apollo the sort of stock that would pop up on value investors' screens.

Apollo's 2011 free cash flow, for example, was $749 million, equal to a chunky 14% of its market value. The company historically has generated significant cash—allowing it to repurchase nearly $4.8 billion of its own shares over the past decade or so.

Of course, things are usually cheap for a reason. Apollo offers a laundry list of concerns, starting with regulatory risk. Its 370,000 students rely almost exclusively on government grants and loans, inviting serious scrutiny from Washington. Even though rules limiting reliance on federal funding and targeting problem areas such as dropout rates were watered down, they have had a big impact on for-profit colleges.Beyond showing a knack for deft lobbying, though, Apollo's approach is encouraging. It has moved to weed out unqualified students and changed sales-incentive structures for admissions. That has cost it business but set it apart from rivals. Now it is growing again, albeit slowly.

Some critics looking at the $1 trillion in student debt announced last week by the Consumer Financial Protection Bureau figure that, sooner or later, the game for what critics deride as "diploma mills" will be up. Perhaps, but the business won't disappear entirely.

When everyone is expecting you to drop out, even a low grade looks pretty good.


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