Apollo Education Group Is a Value Trap

The company's practices are being investigated by the DoD and FTC

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Oct 15, 2015
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Apollo Education Group Inc. (APOL, Financial) is a for-profit education company that started in 1973. Its best-known institution is the University of Phoenix, but it also domestically operates Western International University Inc., The College of Financial Planning Institutes Corporation, Carnegie Learning Inc. and Apollo Lightspeed. Internationally, Apollo Education Group operates Apollo Global which has institutions in England, Brazil, Australia and India.

Recent developments

Last week, Apollo Education Group received a notice from the Department of Defense (DoD) that it had to suspend the practice of recruiting military students. Furthermore, the Federal Trade Commission sent a notice seeking information related to the University of Phoenix’s advertising and marketing practices in July. Not surprisingly, the stock has fallen in concert with these two news events from approximately $33 per share in January to its current price of about $10 per share.

Company financials

The company’s financial ratios look attractive, but that’s on a backward-looking basis. The TTM numbers for PE ratio is 14.69, Price to Book is 0.97, Price to FCF is 9.84, and EV/EBIT is 3.01. However, in the last several years, the for-profit college industry has struggled as bad publicity from increasing student debt and questionable recruitment tactics have tarnished the industry’s image. As a result, enrollment numbers and revenue have fallen dramatically. The University of Phoenix’s average enrollment fell from 357,000 in 2012 to 252,000 in 2014, a fall of about 30%.

University of Phoenix’s enrollment trend

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The table below shows that the University of Phoenix accounts for about 87% of the company’s 2014 revenue. What’s notable is that the school’s revenue fell 32% from 2012 following the decline in enrollment. The table also shows that Apollo Global is growing but not fast enough to offset the declines at the University of Phoenix.

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The chart shows that revenue has fallen by 11.62% per year over the last five years.
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Net income has also been on a steep downward slope, having fallen by 24.25% per year in the last five years.

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Final thoughts

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It remains to be seen what actions will come out of the Department of Defense and FTC notices to Apollo Education Group. Irrespective, the perception of poor behavior will likely further damage an institution that can ill afford any more challenges.

What’s most damning to Apollo is that it does not provide value to its customers. Doing a search of “University of Phoenix” at collegescorecard shows that only a few of the company’s campuses have a graduation rate over 20%. The worst campus, University of Phoenix Boston (graphic above), had a graduation rate of 6%, an annual average cost of $20,500 and a median salary 10 years after receiving federal financial aid of $53,400 per year. For University of Phoenix as a whole, a study showed that 19% of borrowers defaulted on federal loans due in 2011. When default rates outpace graduation rates, that’s a broken business model.