October 14, 2010 / 2:06 PM / 9 years ago

Apollo outlook batters for-profit education stocks

BANGALORE (Reuters) - U.S. for-profit education stocks tumbled to 6-week lows on Thursday after sector bellwether Apollo Group APOL.O withdrew its 2011 outlook amid regulatory uncertainty, and forecast sharp falls in new student enrollments.

Apollo shares slumped 25 percent to a near 4-year low, dragging down rivals such as Corinthian Colleges COCO.O and Career Education (CECO.O).

The sector index .15GSPEDUS was down 19.4 percent at its lowest in 30 months.

Apollo said its response to tough new proposals would significantly impact its ability to attract and retain new students. Executives also blamed negative press coverage for impacting student enrollments.

Analysts cut their 2011 earnings estimates for Apollo and downgraded their ratings on the stock.

“We feel strongly that the company is making appropriate positive strategic changes. However, the upfront disruption will be significantly greater than earlier anticipated,” said Stifel Nicolaus analysts, who cut their rating to “hold” from “buy.”

FBR Capital Markets cut Apollo to “underperform” from “market perform” to reflect the expected significant decline in enrollments and earnings for “what is likely to be the next several years.”

Robert W Baird analyst Amy Junker cut her 2011 EPS estimate by 11 percent to $4.97, and forecast 2012 earnings of $4.89 a share. Apollo earned $5.35 a share, before items, in fiscal 2010.

Apollo’s gloomy outlook underlines the impact that tighter regulatory scrutiny is having on the for-profit sector, and sets a benchmark for rivals yet to report latest quarterly earnings.

In June, Apollo had forecast high-single digit revenue growth for fiscal 2011, with flat operating income, excluding some items — which analysts had thought signaled a bottom.

But Apollo’s withdrawal of this outlook could be a sign that things will get worse before they get better, with the industry facing criticism for leaving students saddled with debt and not fully prepared for the workplace.

Apollo and its peers have moved to prepare themselves for new rules due to be finalized on November 1, including taking steps to weed out ‘high risk’ students — those who may struggle to repay debts — hitting new student enrollment numbers.

Apollo’s new student enrollments fell 10 percent in June-August, and it forecast a 40 percent drop for its current first quarter. The company said it would be 2012 before it saw any growth in new student numbers.

RBC Capital Markets cut its price target by $10 to $45, and said: “Investors now wonder: How much worse can enrollment growth get?”

William Blair analyst Brandon Dobell said Apollo “continues to frustrate investors” with its volatility and the lengthy timeframe it has communicated for a return to strong growth.

But Dobell believes Apollo’s efforts will lead to a more sustainable and potentially more profitable business in the long term.

“While Apollo is taking a hit now to make a massive change to its operating strategy, we believe others will follow its lead,” said Morgan Stanley analyst Suzanne Stein.

“We expect the group to trade down significantly on the back of Apollo’s results, but could start to recover as we approach the (early November) midterm elections.”

Reporting by A.Ananthalakshmi in Bangalore, Editing by Ian Geoghegan

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