Earnings Watch: Valuable Insights on Apollo Group, Dollar General, and Sonic Corp

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As an investor, earnings season provides multiple usages for both opportunity and self-reflection.

First, earnings season provides a quarterly “report card” for your portfolio. Investors should consider listening to the conference call or reading the call transcript in order to determine if a company's results are consistent with your original investment thesis. Second, earnings season creates unanticipated buying and selling opportunities based on market sentiment and emotion.

With the thought process above in mind, here are three companies I’ll be following on Monday, March 25, to reassess my fundamental views.

Apollo Group (NASDAQ: APOL)
Monday, March 25 before market open; Earnings per share $0.18 / Revenue $822.8 million

Apollo Group is a for-profit private education provider, most notably known as the owner of The University of Phoenix higher learning institution. I wrote negatively on Apollo Group back on Jan. 14 in my piece Dropout Investor: Reasons to Avoid the For-Profit Education Sector. Since this time, shares have fallen 12.5% in a little more than 2 months, for reasons I will outline below.

On Feb. 25, Apollo Group filed a Form 8-K with regulators, indicating that its regional accreditor, The Higher Learning Commission, reaffirmed its view that University of Phoenix and Western International University should be placed on probation status. The Commission reached this conclusion based on multiple factors, including but not limited to the quality of student learning and retention / graduation rates.

Famed short-seller David Einhorn of Greenlight Capital is also rumored to have initiated a fresh short position in Apollo. The fundamental story for Apollo Group deteriorated even further in early March when Senate Democratic leaders introduced a bill that would give the U.S. Department of Education greater oversight of for-profit educational institutions.

On March 5, Deutsche Bank upgraded Apollo Group to Hold from Sell ahead of the upcoming earnings release. The call was primarily valuation based, as the German investment firm believes that Apollo Group’s stock has reached “distressed levels” with limited downside going forward.

For the current quarter, I understand Deutsche Bank’s call on the valuation, but I do not see a fundamental reason for the stock to move higher over the medium or long-term. Apollo Group still faces the numerous headwinds I outlined during my in-depth article, and the upcoming earnings call will have an unpredictable effect on the stock. It’s a coin toss, so I advise that readers stay away.

Shares of Apollo Group are currently trading at 11-year lows.

Dollar General (NYSE: DG)
Monday, March 25 before market open; Earnings per share $0.90 / Revenue $4.26 billion

Shares of Dollar General have managed to overcome a surplus of negative news so far in 2013.

In January, competitor Family Dollar fell more than 10% after missing first quarter earnings, a sign of a poor economic outlook for the discount retail space as a whole. The disappointment lead Wall Street to lower its forecasts for not only Family Dollar, but other competitors such as Dollar General. In particular, RBC Capital lowered its price target on Dollar General to $49 from $54 following the Family Dollar news.

Despite slight differences in operational model and store productivity (sales per sq. ft), business performance at a given dollar store operator is generally indicative of competitors in the space.

Wall Street agrees that the environment is difficult, with increased promotional pricing having an impact on margins. The dollar stores also felt the brunt of the increased payroll tax, which went into effect on Jan. 1, decreasing the take-home pay of its customers and their spending power in stores.

In February, the Wall Street Journal published an article citing increased competition for dollar stores. The editorial also makes a case that massive store expansion is having unexpected negative consequences for the industry. Readers may recall that discount retail giant Wal-Mart stated in February that its same-store sales for the month were a “total disaster.”

For the current quarter, it’s difficult to determine whether or not Dollar General will beat or miss expectations ahead of Monday’s earnings release. Management did state in January that DG will open 635 new stores and relocate approximately 550 non-performing stores during the course of 2013.  Revenue at Dollar General has risen 13.4% in the last 12 months, while earnings have grown 35.9%.

Sonic Corporation (NASDAQ: SONC)
Monday, March 25 after market close; Earnings per share $0.05 / Revenue $113.3 million

Sonic Corporation began with a single drive-in restaurant location in Oklahoma back in 1953, and currently operates more than 3,500 drive-ins across the United States. The company’s two operating segments are company-owned stores and franchise stores, with the mix heavily weighted to franchisees at nearly 90% of outstanding stores.

Shares of Sonic Corporation are currently trading at multi-year lows, and have not participated in the broader market rally that began in 2009.

In January, the board of directors at Sonic announced the approval of a larger share repurchase program of $55 million, approximately 8% of the company’s market capitalization of $650 million. Traditionally, publicly-traded companies approve a share buyback plan when management believes their own stock is undervalued.

On Jan. 24, Sonic announced via a press release the resignation of the company President, whose role will be assumed by the current Chief Executive Officer. Wall Street is also concerned about the effect of a nationwide minimum-wage increase on Sonic’s labor costs. In February, President Obama proposed raising the minimum wage to $9 from the current $7.25 during his State of the Union address.

For the current quarter, investors will be looking to learn more about the resignation of President Scott McLain, who will remain active in a transition role through June 2013. Sonic may also provide an update on store development plans (or closures) for the current year, depending on business results.

I would advise readers to avoid Sonic, as the weak fundamentals combined with the recent executive departure should yield little to no upside in share price. The payroll tax hike, which I alluded to above with Dollar General, could also have a negative effect on this quarter’s results.


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