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A Harsh Lesson for Apollo Group

The market flunked Apollo Group (APOL) on Oct. 18, after the for-profit education company announced its eighth straight quarter of lower enrollment growth.

Apollo, whose subsidiaries include The University of Phoenix, posted earnings per share in the three month period ended August 31 of $93.5 million, or 54 cents per diluted share, compared to $106.2 million, or 58 cents per diluted share for the same period last year. The mean analyst estimate for the quarter had been 66 cents per share, according to the San Francisco investment research firm StarMine.

Adding to its travails, Apollo Group also said Oct. 18 that an independent committee has identified "various deficiencies" in its stock option granting process. While the accounting impact has not been quantified, the investigations could result in a possible restatement of the company's financial statements.

The stock tumbled 21.5% to $38.20 per share on the Nasdaq.

The company had a total 292,996 students enrolled in Associate, Bachelors, Masters and Doctoral degree programs during the quarter, compared to 278,245 during the same period last year. Bachelors programs, the degree category that enrolls the largest number of Apollo Group students, posted a loss to 149,414 from 164,912 in 2005.

"We see enrollment gains leveling off in coming year but think operating performance will be lackluster for some time," Standard & Poor's equity analyst Michael Jaffe said in a research note, citing changing demographics, more competition and operating missteps. After reducing fiscal year 2007 earnings estimates, Jaffe slashed his twelve month target price on the stock by $9 to $35. (S&P, like, is owned by The McGraw-Hill Companies.)

Credit Suisse First Boston downgraded the stock to neutral from outperform, noting that enrollments came out lower than expected largely due to higher-than-expected attrition. Analyst Gregory Cappelli says this quarter showed that the company has little room for error, given that its expenses are increasing dramatically.

Apollo Group reported that costs and expenses rose to $478.9 million during the quarter, compared to $422.6 million during the same period last year. The company had increased spending on instruction and promotion, while slashing its administrative overhead.

Cappelli thinks it will take the company longer than expected to turn around, but Apollo Group's President Brian Mueller remains optimistic.

"Since January, we have focused on making significant strategic changes in two major areas of our business: marketing and retention," said company president Brian Mueller in a press release. "Much of the work required to launch our marketing and branding efforts is complete and we are already seeing evidence of its effectiveness."

Mueller added that retention and academic strategies will take longer to implement, but he's confident that investments in such improvements will benefit students and shareholders long run.

The question remains as to whether investors will continue to transfer out of Apollo until that time comes.

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