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Apollo Group, Inc. - Got Rocket Fuel?

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July 05, 2010 – Comments (4) | RELATED TICKERS: APOL , STRA

Last fall, we were asked what we thought of for-profit university and trade school companies as investment vehicles. Our reply at the time was that we had not found one that was not extremely over priced.

We cited an article we had written about Stayer Education, Inc. (Nasdaq: STRA) last year. In the article we noted that in our opinion, the stock was extremely over valued and that new investors saving for retirement, may simply be too late to the party to use this stock as a means to help them reach their retirement goals.

So we were a bit amused when we received a request a few days ago from someone that had read our prior article, but wanted to know what we thought of Apollo Group, Inc. (Nasdaq: APOL), as an avenue for retirement investment.

Our short answer is...forget it.

According to the College Board, the average cost, per year, at a for-profit school is about $14,000, while the average cost per year for a public university, including room and board, is about $15,500. Take out the room and board, and the price drops by about half.

The problem, at least to us is since most students don't have that kind of money in their sock drawer, where does this tuition money come from? According to a report we read on the Bloomberg site, it comes from you and I...at least for now.

BASIS
Financial information related to Apollo Group, Inc., contained in this report, is based on the company’s most recent SEC Form 10-K filing, for year ending August 31, 2009, as filed with the Securities and Exchange Commission on October 27, 2009.

What They Do
The company is one of the world’s largest private education providers and has been in the education business for more than 35 year, offering educational programs and services both online and on-campus at the undergraduate, graduate and doctoral levels through wholly-owned subsidiaries which include The University of Phoenix, Inc., Western International University, Inc., Institute for Professional Development, The College for Financial Planning Institutes Corporation, and Meritus University, Inc.

In addition to the those wholly-owned subsidiaries, the company formed a joint venture with The Carlyle Group called Apollo Global, Inc., to pursue investments primarily in the international education services industry.

Formed in October 2007, the company currently owns 86.1% of Apollo Global, with Carlyle owning the remaining 13.9%. As of August 31, 2009, total cash contributions made to Apollo Global were approximately $511.8 million, $440.5 million of which had been contributed by the company.

To date Apollo Global joint venture has completed the acquisitions of BPP Holdings plc in the United Kingdom, Universidad de Artes, Ciencias y Comunicación in Chile, and Universidad Latinoamericana in Mexico.

Short-Term Investment
The stock price continues to trend down, and has been in an oversold condition for about month, a condition we don’t see reversing in the short-term.

The stock closed recently at $41.86, slightly less than 1% from support, which is currently $41.45. There is a 25% spread between a recent close and first resistance, currently at $52.29, which short-term traders will surely attempt to exploit.

The question in our mind is when will that happen. If things go as they have in the past, computerized trading will start the ball rolling, probably about the time the cow decides to jump over the moon.

Short-term investors may simply want to take a position now and hope for the best, instead of waiting for confirmation that the dish has indeed run away with the spoon.

Long-Term (5 Year Hold) Investment
We have long held that the tangible results of a company are the intangible achievements of management.

In other words, if a company has consistently produced strong financial statements, regardless of whether earnings are positive or not, then to us management is actively engaged in running the company, and over the longer term, we will be well served with an investment in a company managed in such a manner.

We simply do not see such an entrepreneurial management style from Apollo Group.

The company’s Current Ratio, Quick Ratio, and Cash Ratio, are all woefully below what we consider investment quality.

Additionally, the company has a Tangible Book value of $2.71, Goodwill and Intangibles make up more than 22% of the company’s Total Assets, and the company simply has too much debt, which for FY09 equaled $3.69 per share.

We were impressed with Return on Invested Capital at almost 63%, and with Free Cash Flow at $4.68, and believe these metrics will remain consistent over the next year.

But otherwise, we were not overly impressed.

Valuations
Based on our review of the company’s FY09 financial information, we think that a Reasonable Value Estimate for the stock is in the $37 to $44 per share range.

Considering the current trading range, we believe the stock is fairly valued at this time.

Final Thoughts
Americans are being sold a bill of goods by for-profit trade schools and universities. Certainly over a working lifetime, the worker with the greater education should expect to reap the greater economic reward.

Our question of course, is what is the cost for that potential increase in personal economy?

It is our opinion that potential students are starting to realize that the true cost associated with for-profit trade schools and universities is something not determinable until the final check is written, years after the sheepskin ink has finally dried.

Wax

Worksheet

To download the Apollo Group Raw Value worksheet, please click here.

4 Comments – Post Your Own

#1) On July 05, 2010 at 12:07 PM, blesto (31.64) wrote:

Don't the majority of those students fund Apollo with student loans?

Another bubble that may burst.

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#2) On July 05, 2010 at 1:53 PM, MegaEurope (24.98) wrote:

I disagree with your comments on the financials.  Particularly your comment that debt is too high, which is just absurd.  APOL has produced strong results, and if intangible qualities were there to back it up, it would be a buy.

Unfortunately, the intangibles are negative.  Their current business model seems to depend on "ripping the face off" their counterparties.  It seems likely that the government will close the loopholes which have allowed them to profit so much from shady loan terms, instead of profiting from providing educational services.

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#3) On July 05, 2010 at 6:11 PM, wax (97.64) wrote:

MegaEurope;

Certainly compared to cash on hand, the company's debt does not appear to high. Our issue is what happens when the loopholes do close, something we purposely did not elaborate on because it would have simply taken too long.

Should that happen, the cash generated by favorable student loans is likely to be substantially reduced, if not dry up, thus reducing the company's receivable turnover days causing them to utilize more cash to service their debt.

In addition, we did find several articles on the web regarding the student loan "bubble", that Blesto mentioned, which we hope investors will consider.

The point of all of this was simply to highlight potential areas of concern that investors should consider before they jump on the Apollo bandwagon.

Thanx for you comments.

Wax

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#4) On July 05, 2010 at 9:36 PM, goldminingXpert (29.76) wrote:

Should that happen, the cash generated by favorable student loans is likely to be substantially reduced, if not dry up, thus reducing the company's receivable turnover days

and also their revenues, which will NOT allow them to service more debt! 

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