Why This Education Company May Disappoint in 2012
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
Apollo Group (NASDAQ: APOL) is one of the largest and most successful for profit education companies in the world and owns the University of Phoenix, which boasts an enrollment 350,000 students, served through over 200 learning centers in 40 States as well as locations abroad. Its online program blazed the trail for education services over the internet and allows the company to provide over 100 degrees to its students in the areas of medicine, technology, business, education and social services. By 2010, the University of Phoenix saw an enrollment of 200,000 students through its online and onsite programs. The question on investors’ minds is whether or not Apollo Group can continue to stay ahead of its competitors such as DeVry (NYSE: DV), the Education Management Corporation (NASDAQ: EDMC) and Corinthian Colleges (NASDAQ: COCO). These companies have continued to expand offerings, which are putting pressure on Apollo. For example, DeVry has been heavily advertising its Kellogg School of Management.
Apollo Group capitalized on the recession from 2008 onward as it attracted students looking for training that would allow them to get ahead in a difficult economy. The University of Phoenix’s online program offers students flexibility and allows those who work full time jobs to take college courses in their own time. It offers a variety of degrees that range from Associates Degrees to Doctorates in many leading fields. This makes the University of Phoenix stand out among more traditional colleges due to its versatility and ability to accommodate students who have unique schedules and concerns.
Apollo Group is the largest company among its immediate competitors with a market cap of $6.81 billion and employs over 56,000 workers. It maintains an extremely high gross margin at 61%, which exceeds DeVry’s gross margin of 56%. DeVry only employs 10,000 workers, which is comparable to Corinthian Colleges’ 11,000 and the Education Management Corporation’s 15,000. Apollo Group employs 20,000 more workers than these three competitors combined and still operates at a margin of 5% higher than DeVry, with the Education Management Corporation operating at a 54% margin and Corinthian Colleges operating at a margin of 36%.
Apollo Group also has the largest market cap of the group, which eclipses the total market cap of all three competitors. DeVry has a market cap of $2.55 billion, the Education Management Corporation has a cap of $2.64 billion and Corinthian Colleges has a cap of only $430 million, making it the smallest of the four. Apollo Group has grown to dominate the education market, outpacing its competition in every manner, but being the largest company does have its downside due to the focused efforts of competitors to find their own success in the market.
All four education companies saw a decline in quarterly revenue in 2011, and Apollo Group saw the second greatest decline at 11%. DeVry and the Education Management Corporation both declined by about 5% and Corinthian Colleges say a decline of 13%. This slowdown suggests that Apollo Group may be nearing its peak and that it may find it more difficult to sustain growth in the future. This gives the advantage to its competitors if it begins to cost Apollo Group more money to acquire students, effectively cutting its margin and eroding its profitability.
Apollo Group currently possesses $3.2 billion in assets with $2 billion in liabilities. When treasury stock and intangible assets are considered, the company has net tangible assets of less than $1 billion, which puts it in a position where it holds twice its assets in liability. This makes me question the reliability of its stock, which has grown over the last year from $43 per share to $54. It is currently trending downward and its three year picture shows the same bearish trend, with it losing $30 in value from 2009, when it traded at $84 per share.
Apollo Group’s ability to post a profit is not at question at all. It posted a $598 million profit in 2009 followed by $553 million in 2010 and $572 million in 2011. However, its liabilities are a big problem and they are not going away. Apollo group has possessed over $2 billion in liability for the last three years and its assets have remained stagnant at $3.2 billion. This stagnation is what I believe will prevent investors from taking this stock seriously, and it is setting itself up for a disappointing year in 2012.
It could be much worse for Apollo Group. It held net tangible assets of only $434 million in 2009— less than half of its $986 million in net tangible resources in 2011. I don’t believe that it will look attractive to investors until it climbs out of the hole, however, and an 11% decline in quarterly revenue only exacerbates the concerns of investors who hold a position in this stock. Now may be the time to sell, before Apollo Group stock sheds another $30 in value of three years.
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