An Education Stock Learning the Ropes

09/03/2012 8:15 am EST

Focus: STOCKS

David Fried

Editor, The Buyback Letter

For-profit college companies have been having a tough year, but this one has managed to learn some valuable lessons from Wall Street and is on the mend, notes David Fried of The Buyback Letter.

Apollo Group (APOL) is the biggest US for-profit college company (University of Phoenix), and provides higher education programs for working adults. The stock is a recent addition to our model portfolio.

Apollo has both online and on-campus programs at the undergrad, masters, and doctoral levels in 41 states, Puerto Rico, Latin America, and Europe, and has been in the education business for more than 35 years.

This has been a challenging sector for investors, as regulators have cracked down, leading to hits to growth. Student enrollment has been dropping throughout the industry, as students are wary of spending money on higher education.

Companies in the industry are now trying to revamp their businesses to comply with regulators and put them on a more sustainable path. The company launched a new Phoenix Career Services program this past quarter to counteract declining enrollment.

Apollo, with a market cap of $3.2 billion, reported fiscal third-quarter results with earnings per share of $1.20, which trounced analysts expectations (96 cents a share). Net income dropped to $134 million, compared to $212.4 million during the same time last year.

Better-than-expected third-quarter EPS resulted from factors including a decrease in marketing costs (down $2.2 million), a $3.8 million decrease in bad debt expense, and substantial share buybacks costing $329 million. Management has reduced shares outstanding by 19.9% in the last 12 months.

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