On Apr 1, Zacks Investment Research downgraded American Public Education, Inc. (APEI) to a Zacks Rank #5 (Strong Sell). Its stock price has fallen almost 25% ever since the company reported disappointing fourth-quarter 2013 results and issued a bleak outlook for the upcoming quarter on Feb 27, 2014.
American Public is the parent company of online learning provider American Public University System (:APUS) and campus-based Hondros College Nursing Programs, which was acquired in November last year.
Why the Downgrade?
American Public’s fourth-quarter 2013 earnings of 51 cents per share missed the Zacks Consensus Estimate of 54 cents by 5.6%. Earnings also declined 31.1% year over year due to military enrollment hurdles and higher costs. Earnings were near the lower end of management’s expected range of 50 to 54 cents.
Though the top line surpassed expectations, it was only due to the inclusion of $3.8 million of revenues from Hondros, in our view. The APUS revenues were lower than expected due to weaker enrollment trends. Margins also remained weak as costs increased in the quarter.
Total enrollment at APUS declined 9% year over year, worse than the company’s guidance of decline in the range of 3% to 7%. New student enrollments (student starts) at APUS declined 10%, also worse than management’s expectation of a decline in the range of 5% to 9%.
Enrollments in the fourth quarter were adversely impacted by decline in enrollments of students using Department of Defense (DoD) Tuition Assistance or TA benefits. The temporary suspension of the TA due to the government shutdown in Oct 2013 and lowering of the benefits by the military greatly hurt enrollments by military students.
Enrollment trends throughout the education industry have been affected by changing regulatory requirements, sluggish demand due to students’ aversion to debt, stiff competition and a volatile economy. Other education providers like DeVry Education Group Inc. (DV) and ITT Educational Services have also been witnessing sluggish enrollment trends for several quarters.
Moreover, the online provider of high education issued a bleak outlook for the first quarter of 2014. Management expects continued military enrollment hurdles in the first quarter of 2014. New enrollments by students using TA benefits are expected to decline again in the first quarter due to ongoing budgetary constraints and uncertainty. However, civilian student starts are expected to increase year over year.
Considering these factors, management expects first-quarter 2014 total enrollments to decline in the range of 5% to 7%, while student starts are expected to go down in the range of 7% to 9%. American Public expects revenues to remain in the range of flat to an increase of 3%. Management further projects first-quarter 2014 earnings between 43 cents and 48 cents, which marks a significant decline from the prior-year level.
Estimates were largely revised downwards in response to the dismal fourth quarter results. The Zacks Consensus Estimate for 2014 declined 15.6% while that for 2014 declined 12.7% over the last 60 days.
Other Stocks to Consider
Some better-ranked stocks in the education sector include Strayer Education, Inc. (STRA) and Apollo Education Group, Inc. (APOL). While Strayer sports a Zacks Rank #1 (Strong Buy), Apollo Education has a Zacks Rank #2 (Buy).