Apollo Education Downgraded By Bank Of America Amid 'Continued Uncertainty'

In a report published Tuesday, Bank of America Merrill Lynch analyst Sara Gubins downgraded the rating on

from Neutral to Underperform, while lowering the price target from $20 to $14. Uncertainties continue with the company in for another year of transition. "New student starts have been down YoY for 17 of the last 19 quarters. Management has focused on retention but efforts have been unsuccessful. On the 3Q15 call, Apollo announced more significant change," Gubins reported. Management intends to decrease the student base by another 25 percent to 150,000, in an attempt to improve retention. Apollo Education also intends to increase cost cutting in order to achieve operating margins of 15-20 percent over the next three to five years. According to the Bank of America report, "The bar for FY16 seems reasonable, but we see continued uncertainty around the long-term trajectory for enrollment, revenue, and margins." On the other hand, the underlying demand has been weak, while competition from traditional schools has been intensifying. This, according to the analyst, brings the company's pricing models into question. Retention improvements have been elusive Apollo will institute diagnostic exams, increase admissions criteria and eliminate several low performing associate degree programs," Gubins said, adding, "We believe investors will want to see consistent start and retention improvements for sentiment to improve. This will require patience." The FY16 adjusted EPS has been lowered to reflect the lower starts, year-on-year, along with a marginal improvement in retention and lower costs.