We expect education company Apollo Education Group, Inc. (APOL) to beat expectations when it reports third-quarter fiscal 2014 results on Jun 25, before the market opens.
Last quarter, it delivered a positive earnings surprise of 55.6%. We note that Apollo Education has outperformed the Zacks Consensus Estimate in the trailing four quarters with an average positive surprise of 53.7%.
Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Apollo Education is likely to beat earnings because it has the right combination of two key ingredients.
Positive Zacks ESP: Apollo has an Earnings ESP of +3.08%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Apollo carries a Zacks Rank #3 (Hold) which when combined with a +3.08% ESP makes us confident in looking for a positive earnings beat.
Note that stocks with Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
What is Driving the Better-than-Expected Earnings?
Cost reduction and improved efficiency is helping Apollo Education beat earnings expectations quarter after quarter despite weakness in revenues and enrollment trends. The post-secondary education provider’s accelerated efforts to right-size its business through significant layoffs and campus closings are lowering the costs. We believe lower costs should boost profits for Apollo Education in the third quarter as well.
Apollo Education’s enrollments have been sluggish for several quarters due to regulatory challenges, changes in marketing mix, changing regulatory requirements, sluggish demand due to students’ aversion to debt, stiff competition and volatile economy. In fact, enrollment trends throughout the education industry have been affected by these headwinds. Other education providers like DeVry Education Group Inc. (DV) and ITT Educational Services have also witnessed sluggish enrollment trends for many quarters.
Apollo Education’s new enrollments declined in fiscal 2012 and 2013, and are expected to go down in fiscal 2014 as well. However, management expects new enrollment trends to improve in the remainder of the year.
Moreover, aggressive investment in academic quality and recent price cuts should improve student value proposition and retention rates for Apollo. We expect these turnaround efforts to improve enrollment trends and boost margins in the future quarters.
Other Stocks to Consider
Other education stocks that have both a positive Earnings ESP and a favorable Zacks Rank are:
Education Management Corporation (EDMC), with Earnings ESP of +6.67% and a Zacks Rank #3.
Bridgepoint Education, Inc. (BPI),withEarnings ESP of +14.29% and a Zacks Rank #3.