Apollo Education (APOL) Deserves Every Bit of Today’s Monster Plunge

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Frankly, nobody should be surprised Apollo Education Group Inc (NASDAQ:APOL) saw its fiscal Q2 revenue fall as much as it did. No investor can be truly surprised about the loss of 10 cents per share of APOL stock taken last quarter. There’s no one who can actually reasonably say they didn’t expect further deterioration in the number of enrollees of the University of Phoenix and the other for-profit education programs Apollo Education offers.

Apollo Education (APOL) Deserves Every Bit of Today's Monster PlungeIndeed, the only thing surprising about this morning’s release announcing Apollo’s second-quarter results was the fact APOL stock was priced as high as it was before Wednesday’s 25% plunge.

It may be time to acknowledge APOL — and most for-profit education stocks, for that matter — are lousy investments, and will be for a long while.

Apollo Education Results, Outlook

In all fairness, it’s not like Apollo’s second-quarter results were a complete disaster. Apollo Education Group earnings were better than anticipated; specifically, the loss of 10 cents per share of APOL was 6 cents better than average Wall Street estimate.

But that’s where the good news ends.

Revenue fell 14%, to $578.6 million, falling short of estimates of $585.1 million. New enrollments fell 13% to 28,300, while total enrollments were off 15%, to 213,800, on a year-over-year basis. And while the 10-cent loss was better than expected, it still was alarmingly worse than the profit of 30 cents per share of APOL seen in the second quarter of last year.

Oh, and as it turns out, not only was Apollo Education Group expecting to see more of the same kind of negative comparisons well into the foreseeable future, but those results are apt to be even worse in the near-term than had been initially expected.

Revenue for the current fiscal year (ending in August) is expected to roll in somewhere between $2.63 billion to $2.68 billion, versus prior guidance of somewhere between $2.74 billion to $2.8 billion. The revised revenue expectation is about 12% less than last fiscal year’s top line of $3 billion.

For-Profit Education Is Still Its Own Worst Enemy

It’s no big secret that APOL stock and other for-profit education stocks — see: Career Education Corp. (NASDAQ:CECO) and ITT Educational Services, Inc. (NYSE:ESI) — are dealing with some headwinds, mostly stemming from stricter regulations of government-backed student loans and dinged reputations regarding the actual value of their educational programs.

But prior to last quarter, Apollo Education Group was profitable, and the revenue slide in the low teens isn’t exactly catastrophic. It’s far from “good,” but it seems survivable until Apollo can fix what’s wrong.

There’s the rub, though: If APOL was capable of truly fixing what was wrong, it would have done so by now.

The story’s been in circulation so long now that its origins have been forgotten. So, as a reminder, the industry-wide contraction extends all the way back to 2011. Apollo’s revenue has fallen every year since 2010’s peak, and is expected to keep falling through fiscal 2015. The bleeding is expected to stop in 2016, but in light of this morning’s lowered guidance, perhaps hope of stability next fiscal year is premature.

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In fact, doubts may well be merited.

Apollo Education Group and its for-profit education peers have had four years to put together some sort of turnaround. They haven’t, possibly because they simply can’t. The true underlying problem — a business model primarily designed to siphon government-sponsored student loan  rather than providing a marketable education — just doesn’t work anymore. The company has yet to actually explain exactly how or why 2016 and 2017 are going to be any different than every year since 2011.

With that being said, in many ways, last quarter’s results may mark the point where things have gone from bad to worse.

As was noted above, even with all of its troubles since 2010, Apollo Education Group had remained a profitable company. That income was shrinking, but it was positive all the same. This changed last quarter with the loss of 10 cents per share (a total net loss of $17.1 million).

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While Apollo is expected swing back into the black next quarter following the usually weak Q2, given the clear trend and the lack of a clear, plausible turnaround plan, one can’t help but worry that forward-looking estimates are too optimistic. If that’s the case, then faithful shareholders have a new wrinkle … the organization isn’t in a position to be reliably profitable anymore, either either.

That may have been the one thing keeping shareholders on board.

Bottom Line

Never say never; turnarounds can and do happen. The question here is whether Apollo education and for-profit education companies are actually capable of pulling one off.

Given that the woes look more systemic in nature rather than operational (internal), last quarter’s results and how they fit into the bigger picture may tacitly point to an increasingly disappointing future for APOL.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/apollo-education-group-inc-apol-stock-for-profit-education/.

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