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Published: November 24, 2009
Unemployment hit 10.2% in October. That's
only the second time that figure has ventured into double-digit
territory since World War II.
And it may get worse.
Many economists predict the unemployment rate won't peak until
mid-2010 at 11%.
That's bad news for most sectors in the economy. People without
jobs tend to not spend money. Many of them do, however, return
to school to strengthen their resume or learn a new trade.
As a result, revenues and earnings in the for-profit sector have
been on a tear since 2007. While most stocks were slammed during
the downturn, shares of these for-profit educators shot up.
One of the best performers was Apollo Group (Nasdaq: APOL).
From January 2007 to January 2009, Apollo's shares gained +101%
while the S&P 500 index fell -36%. Its shares peaked at $90 in
the beginning of 2009, not long before the S&P bottomed in early
March. And through it all, Apollo's earnings have continued to
rise.
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Then came October 27. That's when Apollo
said the SEC was launching an informal inquiry into its
accounting. Apollo's shares fell -15.1% on the news, accounting
for the lion's share of a -28% loss year to date.
There is limited information on SEC's inquiry, only that it
relates to Apollo's revenue recognition practices. Apollo said
that its accounting policies are appropriate and in accordance
with generally accepted accounting principles (GAAP). Apollo's
last informal inquiry in 2006 related to stock-option grants and
did not lead to any enforcement action by the SEC.
While it's possible that historical earnings will be restated as
a result of the inquiry, the SEC's action is unlikely to affect
Apollo's future ability to generate revenue, thanks, ironically,
to another government agency -- the U.S. Department of
Education.
One of the main investor fears associated with the SEC inquiry
was that the University of Phoenix, Apollo's main source of
revenue, would not be recertified. The Department of Education
alleviated those concerns when it recertified the university on
November 16. This guarantees that University of Phoenix students
will continue to receive federal grants and loans from the
government until at least December 31, 2012, when the school
will again be eligible for recertification.
This is a hugely favorable development for Apollo, since 86% of
its revenue comes from government aid given to students. It also
suggests that the University of Phoenix is in compliance with
the Department of Education's regulations and that the SEC's
inquiry probably won't affect future cash flow, whatever else
the outcome.
And the cash keeps flowing. Apollo is one of the world's largest
education providers and has been in business for more than 30
years. The University of Phoenix is the largest university in
North America. With a current enrollment of about 500,000
students, the student body at the University of Phoenix is 10
times larger than that at The Ohio State University, the biggest
public university in the United States. Enrollment at the
University of Phoenix at the end of fiscal 2009 August 31 was
23.5% higher than a year earlier.
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The recent sell-off has Apollo's shares trading at a -44%
discount to their 5-year average earnings multiple. That's a
steep discount considering the S&P 500 index is trading at a
+29% premium to its 5-year average earnings multiple. Investors
should be cautious regarding the SEC inquiry, but going forward
Apollo is a market leader that continues to expand its revenue
base - that's nothing but good news for its share price going
forward.
-- Francisco E. Bermea
Staff Writer
StreetAuthority |
