Outlook for education stocks brightens after Apollo results
(Reuters) - University of Phoenix owner Apollo Group Inc (APOL.O) stunned Wall Street with its ability to trim fat and by finally reporting a slowdown in new enrolment declines, lifting shares of the for-profit education companies.
Apollo's shares rose to their highest in a year after the company reported a fourth-quarter profit that was more than twice of market estimate and said it would cut more costs in 2014.
"We are positively surprised at the level of expected costs cuts in fiscal 2014 after 2013," Deutsche Bank analyst Paul Ginocchio wrote in a note to clients.
The for-profit education industry's reputation has taken a beating due to government investigations that found high student-debt loads and a low graduation rate.
Education companies were forced to change the way they admit students or risk losing federal aid, leading them to lose share to non-profit colleges.
Apollo began a cost-cutting drive last October to offset declining revenue as students stayed away. The company shut 25 campuses, cut jobs and closed half of its University of Phoenix learning centers.
The company, which said on Tuesday that it was changing its name to Apollo Education Group, reduced expenses by $350 million in its fiscal year ended August 31. The company said it expects to save at least $300 million more in 2014.
"We view Apollo's cost cuts as a good template for Strayer should demand woes continue," William Blair analyst Timo Connor said.
Shares of Strayer Education Inc (STRA.O) rose 9 percent on Wednesday. The stocks of ITT Educational Services Inc (ESI.N), DeVry Inc (DV.N) and Corinthian Colleges Inc (COCO.O) were also up 3-4 percent.
However, analysts cautioned that a full recovery was still about two years away.
"Given a weak demand environment, an increasingly competitive and commoditized market industry backdrop and Apollo's sheer scale, visibility into an enrollment recovery remains limited over the next 24 months," Piper Jaffray & Co analysts wrote in a note to clients.
While cost cuts helped Apollo boost profit, its efforts to freeze tuition fees to attract students have also started delivering.
The company reported a 22 percent fall in new enrolments in the fourth quarter, compared with a 24 percent fall in the preceding quarter. This is the first time in more than a year that it has said the decline in sign-ups is slowing.
Apollo said the decline in sign-ups could slow further in the current quarter.
"To help ensure our students persist and complete their education, we're redesigning our curriculum both at a program and course level," Chief Executive Gregory Cappelli said on a post-earnings conference call.
Apollo also said on Tuesday it was lowering tuition fees at the University of Phoenix and would cut them by half at the smaller Western International University.
"While we will need to see more evidence of a sustainable turn in demand to get more positive on the stock for the long term, we believe management's recent price cuts should stimulate enough demand and retention progress ... in the near term," Connor said.
Apollo's stock was up 25 percent at $26.11 on Wednesday afternoon on the New York Stock Exchange.
(Editing by Kirti Pandey)
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