Apollo, Education Shares Slide on Bleak Enrollment Outlook
Apollo, Education Shares Slide on Bleak Enrollment
Joshua Lott/Bloomberg
Signage for the University of Phoenix, part of Apollo Group Inc.
Signage for the University of Phoenix, part of Apollo Group Inc. Photographer: Joshua Lott/Bloomberg
Apollo Group Inc., the biggest U.S. for-profit college by enrollment, led education shares to their biggest plunge in more than 5 years today after executives described a bleak future for signing up new students.
Apollo, owner of the University of Phoenix, fell 23 percent to $38 in New York trading, helping send an index of 12 education companies down 18 percent, the most since at least January 2005. Education Management Corp. dropped 23 percent to $10.22, while Devry Inc. tumbled 17 percent to $42.06, as education companies registered the six biggest declines in the Russell l000 Index. Washington Post Co., owner of Kaplan University, fell nine percent to $390.25.
New student enrollment in the quarter ending in November may drop more than 40 percent from a year earlier, Apollo said. The company eliminated the setting of recruiter pay tied to enrollment results as of Sept. 1, a move the company expects will lead to more experienced students who are more likely to graduate, Ryan Rauzon, an Apollo spokesman, said in an interview today.
For-profit colleges are changing enrollment practices because of proposed tougher regulations and Senate education hearings that highlighted the industry’s high dropout and loan- default rates, said Ariel Sokol, an analyst with UBS Investment Research in New York. The Obama administration is preparing new rules to regulate recruiting and tie eligibility for federal student aid to the success of graduates getting jobs.
Revenue Decline
“The industry is legitimately concerned about the viability of their business models where most of their revenue comes from the government,” said Sokol, who rates Apollo shares “neutral” and doesn’t own them, in a telephone interview. Companies’ efforts to respond to increased regulation will “result in revenue decline and margin contraction in the near term.”
Apollo, based in Phoenix, fell $11.50 to $38 at 4:00 p.m. in Nasdaq Stock Market composite trading, its lowest level since 2006, for the biggest loss in the Standard & Poor’s 500 Index. The shares have lost 50 percent in the past 12 months.
Apollo expects to exceed legal limits on the share of funds received from government financial aid, jeopardizing its biggest source of revenue, Brian Swartz, the Phoenix-based company’s chief financial officer, said yesterday in a call with analysts and investors.
Federal Student Aid
The University of Phoenix’s dependence on federal student aid is “likely to exceed” 90 percent of revenue in fiscal 2012, violating a federal law known as the “90-10” rule, Swartz said in the analysts’ call. If a for-profit college doesn’t comply with the rule for two consecutive fiscal years, it loses eligibility to receive student-aid funds for at least two years.
The University of Phoenix derived 88 percent of revenue from federal student aid in fiscal 2010, an increase from 86 percent a year earlier, Swartz said.
“We continued to see upward pressure on our 90/10 calculation,” Swartz said.
Phoenix derived 48 percent of revenue from federal grants and loans in 2001, when it primarily focused on bachelor’s degree and graduate degree programs for managers whose employers paid their tuition. It then shifted its business strategy, opening a two-year online college called Axia that primarily attracts lower-income students who depend on federal financial aid. Phoenix now has more than 200,000 students seeking two-year degrees.
New Enrollment
Other for-profit colleges, including Santa Ana, California- based Corinthian Colleges Inc. and San Diego-based Bridgepoint Education Inc., risk running afoul of the 90-10 rule, said Trace Urdan, an analyst with Signal Hill Capital Group in San Francisco. Corinthian Colleges fell 20 percent to $4.79. Bridgepoint fell 15 percent to $14.61.
Apollo’s enrollment of new students in degree programs fell to 92,000 in the fourth quarter ended Aug. 31, from 102,000 a year earlier, the company said in a statement yesterday. Enrollment in the first quarter of fiscal 2011 may drop more than 40 percent over the same period last year, Swartz said yesterday.
Apollo faces increased competition enrolling students in its four-year bachelor’s degree programs which generate more revenue than two-year associate’s degree classes, Urdan said.
FBR Capital Markets cut its rating on Apollo to “underperform” from “market perform” today, while Stifel Nicolaus downgraded Apollo to “hold” from “buy.”
CNBC’s Jim Cramer said today for-profit education stocks are “finished” and that companies in the sector need to find new ways to create value.
To contact the reporters on this story: John Lauerman in Boston at jlauerman@bloomberg.net; Esmé E. Deprez in New York at edeprez@bloomberg.net
To contact the editors responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net.
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