Blog: Preparing to Hit Rock Bottom

On Tuesday, The Apollo Group (APOL) reported a $64 million loss for the fiscal second quarter and a 45% drop in enrollments, and industry wisdom predicts that things are going to continue getting worse before they get better. Yet on Wednesday, BMO Capital Markets analyst Jeff Silber held a conference call to explain the reasons why Apollo has now been upgraded from "Market Perform" to "Outperform".

Apollo is projected to hit rock bottom before any of its peers — sometime in 2012 — and after staying there throughout much of 2013, experience a likely turnaround. As Silber said Wednesday in a conference call, "We think this company will see the fundamental bottom before most of its peers, given that many of its "quality focus" initiatives (e.g., University Orientation) were done earlier and to a greater magnitude than the rest of the group."

Of course Apollo’s “quality focus” initiatives, like University Orientation (a ‘trial run’ for any potential students with fewer than 24 credit hours), are commendable for students and their impending loans– but they’re also fluff for the company’s bottom line. The expensive program gives Apollo considerable wiggle room for cost reduction if fundamentals get worse than expected.

For all intents and purposes, this upgrade seems to be a case of preparing for the inevitable darkness before the dawn. Silber gave three major reasons for the upgrade:

“Number one, this company is ahead of the curve. No matter what the final gainful employment regulations look like, and we’re still waiting for this thing, who knows when they’re coming out, the industry is shrinking. Even without gainful employment. And the focus is shifting from inputs like enrollment growth to outputs like graduation. This company, Apollo, was the first to really begin to self-regulate, to shrink its own business by being more selective in terms of enrollment through such initiatives as the university orientation program that they announced a few months back, so we think this company will likely be the first to see the bottom of fundamentals as well, so again they’re ahead of the curve.”

“Number two … We’ve had about five months of this [University Orientation] program, and again what this orientation program does is for any potential students that come in with fewer than 24 credits, you go through this orientation program to try to see if you can really make it in college” “Obviously, it’s costly for the company to do this, but we think in terms of enhancing the quality of the student base … it’s a great program to install, and a number of other companies have also started doing something similar.”

“… Point number three, I think as of this morning, Street expectations are a lot more realistic. Now, we did see some downward estimate revisions just before the company reported, but until a few weeks ago, street consensus was looking for fiscal year ’12 to be better than fiscal year ’11, and I’ve always been scratching my head at that.”

As the largest career college group, Apollo is forging ahead of the pack, there’s no question about that. But by doing more, and doing it faster, is Apollo necessarily setting itself up to rebound higher and faster than the rest of its peers? What if “rock bottom” isn’t as low or as rocky for smaller school groups? Should the rest of the industry take this premature praise of Apollo as a sign to borrow trouble and put into place extraneous programs? Personally, I’d wait to see what we’re actually up against.

Listen to a replay of BMO’s Wednesday Conference call through April 6 at 866-420-4831/203-369-0793.

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