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BANGALORE, Oct 28 (Reuters) - Shares of several U.S. adult education companies tumbled a day after Apollo Group Inc APOL.O said federal regulators had launched an informal inquiry into its revenue recognition practices.
Apollo’s shares were down 15 percent at $61.92 in pre-market trade on Wednesday, while Corinthian Colleges Inc COCO.O was down 6 percent.
Shares of rival DeVry Inc DV.N, however, rose 2 percent to $56.00.
Apollo, the parent of University of Phoenix, said it became aware of the inquiry by the U.S. Securities and Exchange Commission last week but could not determine its scope, duration or outcome. [ID:nN27264498]
At least three brokerages downgraded the company, saying the lack of information about the inquiry could hurt the stock.
The inquiry could be something specifically related to Apollo or could be industry-wide, Signal Hill analyst Trace Urdan said, as the company has no “material differences in the way it recognizes revenue versus the other players in the group.”
Apollo said there had been no significant changes to the way it recognized revenue, other than shifting from a weekly to a daily recognition process in its fourth quarter ended Aug. 31.
Shares of education companies have been rattled by regulatory concerns over the past several months as investors fear more scrutiny into the sector under the administration of U.S. President Barack Obama.
“What is very disconcerting is that the SEC targeted Apollo, which is a large, publicly traded, for-profit institution,” Wedbush Morgan Securities analyst Ariel Sokol said.
DeVry, which also reported results late Tuesday, said it had no issues with its revenue recognition.
The inquiry overshadowed strong results from Apollo and DeVry that topped market expectations.
BofA-Merrill Lynch downgraded Apollo to “neutral”, saying the company would be affected until more information about the inquiry became available.
RBC Capital markets also downgraded Apollo to “underperform” from “sector perform”. Morgan Stanley cut its rating to “equal weight” from “overweight”.
Apollo said it is exploring the possibility of selling its online high school unit, Insight Schools, which the company acquired in 2006.
Insight generated an operating loss in 2009, mainly due to regulatory compliance costs and additional start-up expenses, the company said on a conference call with analysts on Tuesday.
Apollo said its acquisition earlier this year of BPP Holdings, a British-based provider of professional education and traning, would be dilutive to earnings in 2010. Earlier this year the company had said the transaction would have no impact on 2010 profits.
“BPP experienced lower new student enrollments in the fall of 2009 versus 2008, due to economic conditions in the UK,” the company said.
Oppenheimer’s Scott Schneeberger upgraded DeVry to “outperform” from “perform”, saying the company’s autumn enrollments to be reported in December will likely remain strong, leading to strong revenue growth.
“Notably, we’d be opportunistic near-term if a trade-off occurs on sympathy with an industry peer’s recent SEC inquiry,” he added. (Reporting by Amulya Nagaraj in Bangalore; Editing by Mike Miller)