On Jan 25, we upgraded our recommendation on Apollo Education Group, Inc.(APOL) to Outperform from Neutral after it beat the earnings expectations in the first-quarter of fiscal 2014 and raised 2014 revenue, operating income and cost savings targets despite weak revenues. Apollo Education carries a Zacks Rank #2 (Buy).
Why Raised to Outperform?
On Jan 7, Apollo Education reported first-quarter fiscal 2014 results. Despite declining 14.8% year over year, Apollo Education’s earnings of $1.04 per share outpaced the Zacks Consensus Estimate by 15.6%. We believe that significantly lower cost and taxes in the quarter helped the company beat earnings expectations despite weak revenues and declining enrollments. However, encouragingly, management indicated that December rate of new enrollment decline was better than the first quarter. Also, student persistence trends were strong; improving 140 bps (year over year) in the first quarter as the retention rates were better in the quarter with the company’s student retention initiatives gaining traction. In fact, management expects enrollment trends to improve throughout 2014.
Notwithstanding weak top-line and declining enrollment trends in the first quarter, Apollo Education raised its 2014 revenue, operating income and cost savings targets. Apollo Education increased its top-line guidance for fiscal 2014 to a range of $3.0 billion–$3.1 billion from prior expectation of $2.95 billion–$3.05 billion. Adjusted operating income guidance was slightly increased from a range of $375 million–$450 million to a range of $400 million to $450 million. The company also increased its cost savings target by $25 million for fiscal 2014 and now expects $325 million in FY14.
Estimates were largely revised upwards in response to the better-than-expected earnings results and the enhanced guidance. The Zacks Consensus Estimate for 2014 and 2015 increased 6.2% and 5.8% over the last 30 days, respectively.
Apollo Education has accelerated efforts to right-size its business through significant layoffs and campus closings which should make it more competitive in the long term. Apollo Education’s investments in adaptive learning, curriculum development, new learning systems/student service platforms and recent price cuts should improve student value proposition and retention rates. We believe these turnaround efforts should improve enrollment trends and boost margins. All these factors propelled us to upgrade our recommendation on Apollo Education.
Other Stocks to Consider
Investors interested in the education sector can invest in stocks like American Public Education Inc. (APEI), Strayer Education Inc. (STRA) and New Oriental Education & Technology Group Inc. (EDU). All these stocks have the same rank as Apollo Education.
In fact, the education sector is witnessing a positive momentum with President Obama’s expanded federal support to help more students afford college education and other recent positive educational policy changes.