Shares of Apollo Group (NASDAQ: APOL — $66.88) are down over 14% today after their quarterly report last night. We don’t follow the stock from a research standpoint but have taken an interest in the share price in the last few months as it has defied market gravity.
Most of the analyst reports we have seen so far are defending the shares here and see the concerns fueling the sell-off as overblown. However the stock decline merely reflects a moderation of what have been near-perfect conditions for Apollo during the last few quarters. Analysts tend to straight-line these trends into unrealistic expectations. Management outlined very sensible business plans going forward but they may produce less than historic upside and margin expansion.
Apollo has been blessed with rising prices and decreasing costs to put the wind at their back and create a string of solid execution and strong quarters. Now there are some very minor blemishes in the future vision as 1) government programs are shifted to direct-to-student lending, 2) Apollo will be getting a bit more scrutiny from regulators, 3) the company says they will be making some investments to improve their technology and programs and while not yet evident in results per-se, 4) there are some signs that the economy is having a minor impact on Apollo.
So what does one do with Apollo here? The simple view is that the price of the shares now looks fair at 16-17x current estimates. The complicating factor is that most analysts that follow the stock continue to somewhat stubbornly defend it and some are (perversely) still raising forward estimates on the stock. (Note to sell-side analysts: If you like a stock you want to keep estimates low and if you hate a stock you keep your estimates high. It goes against peer pressure and conventional wisdom but that’s how it works. You do your work with unpublished numbers and commentary.)
Before the report we saw some models that were suggesting a fairly strong accelerating in top-line growth. It’s too soon to tell how things will settle out with consensus as we’ve only seen a few reports so far. But the ones we saw are raising earnings estimates for the current year and the out year.
Based on what we know now it’s hard to imagine the company will make new 52-week highs this year. So that suggests to us a stock that’s range-bound in the $75–55 band. It’s a wide one but well within the 52-week high/low on the shares. The reason we think another 10 points of downside exists from here is that the company may transition into a “meets expectations” from a “beat and raise” sort of momentum stock. That will attract a different type of investor at more GARP (growth at a reasonable price) style valuations. The company also has $500M authorized for stock repurchasing so that could be a factor in the market at some point.
From a short perspective the home run possibility is that there is a major “hiccup” in the transition to direct-to-student loans which is a major shift. Apollo certainly can navigate it without a hitch but as everyone knows any change brings some risks along with rewards.
Despite all the efforts of management we still feel that Phoenix retains the cloud of a “mail order degree” during a time when degrees of any sort (even Harvard) seem to matter less.
We think that future recruiting is more “show me what you can do” and less “show me what you know.“ Not something we would make a stock call from but a trend that argues against taking on loans to get a piece of paper versus alternatives.
[Disclosure: Research 2.0 has a small short position in APOL.]
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