Will A Large Share Buyback Help This Sagging Stock?
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After announcing its second quarter financial results, higher education firm Apollo Group (NASDAQ: APOL) revealed that it had authorized a share buyback program that will allow it to repurchase more than 14 million of its own shares at market prices. With no fixed termination date, the $250 million buyback program will continue indefinitely. It comes on the heels of a rough two years for Apollo's stock.
This is not the first share buyback that Apollo's management team has authorized in recent years. In fact, the company has bought back more than 50 million of its own shares since 2005.
However, it should be noted that the reasoning for these buybacks has changed over time. During the breakneck growth phase that the company enjoyed in the mid-2000s, Apollo used repurchases to reward its shareholders in lieu of regular dividend payments. Today, the company's poor financial performance has led many observers to conclude that the buybacks are intended to prop up a fundamentally unhealthy stock. In any event, investors may be able to leverage Apollo's capital moves to turn a sizable profit.
Under the terms of the buyback plan, Apollo will repurchase up to $250 million worth of its own shares. The buyback authorization will remain in force until the company reaches the pre-arranged buyback cap or manually terminates the deal ahead of schedule.
At Apollo's current share price of $17.38 the repurchase amounts to approximately 14.4 million shares of the company's stock, or roughly 12.7% of shares outstanding. If the company takes full advantage of the authorization, regular Apollo shareholders could see the value of their holdings rise by 15 to 20 percent in the absence of further news.
Most companies in the for-profit education space have had low valuations for years due to the uncertainty regarding industry regulations and certain ethical issues that many of the companies face. DeVry (NYSE: DV) is often cited as a major competitor of Apollo. Like Apollo, DeVry's market capitalization hovers around the $2 billion mark. It also offers a wide range of in-person and online educational courses that cater to students in the United States and abroad. DeVry earned $157.5 million on approximately $2 billion gross revenues in 2012.
Apollo also competes with smaller and more specialized firms. For instance, its graduate-level offerings face stiff competition from those of the much smaller Education Management Corporation (NASDAQ: EDMC). Like Apollo, Education Management focuses on issuing four-year and graduate-level degrees through its network of secure online learning platforms and physical campuses. In 2012, Education Management suffered steep losses despite having billions in sales.
All three companies have forward P/E ratios lower than the S&P 500 average. Apollo is at 8, DeVry is at 12, and Education Management is at 13.3. Apollo and DeVry have been quite profitable over the years, but Apollo saw a significant loss in earnings over the past year. Each of these three companies had a decrease in sales. DeVry is looking the strongest since it has no debt, a recent increase in earnings, and the smallest sales decline. The market has been hard on Apollo and Education Management, as both company's stocks dropped over 50% in the last year.
Long-Term Outlook and Possible Plays
Apollo has struggled lately to find its footing. It is now among the most heavily shorted S&P 500 components and has been subject to several analyst downgrades in recent months.
Although the American for-profit education model remains intact, Apollo has been beset by concerns about the quality of its educational offerings, the job-market competitiveness of its graduates, and the debt burdens that many of its current and former students face. In fact, there is evidence that these debts are becoming a systemic problem for publicly traded education providers like Apollo. If the company is unable to improve the quality of its offerings, the reputation of its programs, and the financial aid terms that it offers to its students, it may find it difficult to remain competitive in the long term.
In the short term, these problems are unlikely to impede Apollo's performance to a significant degree. Investors who wish to profit from the company's latest buyback program can do so by initiating short-term long positions and watching for signs of a renewed downtrend. The fact that the company's stock is heavily shorted may also work in short-term investors' favor: once it starts, a short squeeze could intensify any buyback-related rally.
In sum, Apollo Group is a somewhat troubled firm that is making a strong effort to reward its long-term shareholders. While the company might not be a good long-term investment, the upcoming buyback is likely to result in favorable short-term price action. Investors who are willing to accept some risk may wish to examine Apollo at these levels.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!