Apollo Group's Forecast Withdrawal Drags Down For-Profit Education Shares
Education stocks plunged after Apollo Group Inc., the biggest education company by enrollment and operator of the University of Phoenix, withdrew its forecast for fiscal 2011 citing regulatory scrutiny and a possible 40 percent decline in new students.
An index of 12 education stocks fell 20 percent at 9:37 a.m. New York time. 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. The first quarter of fiscal 2011 may see an enrollment drop higher than 40 percent year over year, Brian Swartz, the Phoenix-based company’s chief financial officer, said yesterday.
Apollo, based in Phoenix, faces increased competition enrolling students in its four-year bachelor’s degree programs which generate more revenue than two-year associate’s degree classes, said Trace Urdan, an analyst with Signal Hill Capital Group in San Francisco. Apollo also cited increased regulatory pressure as the Obama administration prepares new rules to regulate for-profit college recruiting and tie eligibility for federal student aid to the success of graduates in getting jobs.
The projected enrollment decline is “going to destroy the stock and make it really difficult to tell what the right price to pay for the stock is,” Urdan, who cut his rating on the shares to “hold” from “buy” and doesn’t own them, said yesterday in a telephone interview.
Apollo fell 25 percent, to $37.20 in Nasdaq Stock Market trading for the biggest loss in the Standard & Poor’s 500 Index. The shares had lost 34 percent in the past 12 months before today.
Education companies were the six biggest decliners in the Russell l000 Index. ITT Educational Services Inc. tumbled 19 percent to $53.25, while Education Management Corp. dropped 18 percent to $10.89.
FBR Capital Markets cut its rating on Apollo to “underperform” from “market perform” today, while Stifel Nicolaus downgraded Apollo to “hold” from “buy.”
The company said in May it expected “high single-digit consolidated net revenue growth” in fiscal year 2011 and that operating income would remain unchanged.
Apollo said yesterday that industry challenges including “ongoing regulatory and other scrutiny which has led to heightened media attention” is likely to “adversely impact its operating metrics and financial results.”
Recruiters at for-profit colleges operated by Apollo, Pittsburgh-based Education Management Corp., and the Washington Post Co.’s Kaplan education unit pressured students to sign up for courses because their pay was tied to enrollment, the U.S. Government Accountability Office, the investigative arm of Congress, said in a report released Aug. 4. Senator Tom Harkin, an Iowa Democrat and chairman of the Senate’s education committee, is investigating for-profit college recruitment practices, program quality and use of government funds.
Education Secretary Arne Duncan pledged to increase the size of his department’s enforcement unit and conduct more operations to detect fraud and abuse. The department plans to publish rules on or about Nov. 1 that will restore a ban on education companies’ paying recruiters based on the number of students signed up.
Apollo has shifted its emphasis to four-year bachelor’s degree students, who generate more revenue once they’re enrolled and are less likely to drop out than those in two-year programs, Urdan said. New bachelor’s degree enrollments rose to 36,200 in the fourth quarter from 31,700 a year earlier, Apollo said. New enrollment in two-year associate’s degree programs fell to 42,200 from 55,400 a year earlier.
The company’s anticipated 2011 enrollment decline will be due in part to its University Orientation Program, a free, three-week, noncredit course that enables students to sample the demands of college, said Greg Capelli, Apollo’s co-chief executive officer, during the conference call. About 30,000 students have been through the program and about 20 percent decide not to enroll in the University of Phoenix, he said.
The students leave without any debt burden and generally keep a positive view of the university, he said.
“We believe that many of these students would have dropped anyway,” Capelli said. As a result of the program, “we expect to see improved student outcomes, including improved retention rates.”
Apollo yesterday reported fourth-quarter income from continuing operations fell to $47.5 million, or 32 cents a share, from $97.2 million, or 62 cents a share. Revenue rose 17 percent to $1.26 billion. The company acquired BPP Holdings, the London-based provider of education services and publications, in July 2009.
Earnings excluding some items of $1.31 beat the $1.30 average estimate of 22 analysts surveyed by Bloomberg.
To contact the editors responsible for this story: Jonathan Kaufman at email@example.com.