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Apollo Group shares tumble on guidance cut

NEW YORK (AP) -- Shares of Apollo Group Inc. tumbled Wednesday after the for-profit education company reported a steep drop in fiscal third-quarter net income and issued a lower-than-expected revenue prediction for the full year.

THE SPARK: Apollo, which owns the University of Phoenix, said late Tuesday that its profit for the quarter ended May 31 fell 40 percent. Despite the plunge, the company's adjusted profit came in well ahead of Wall Street predictions. But its revenue dropped 16 percent to fall slightly short.

For all of 2013, Apollo said it expects revenue of $3.65 billion to $3.7 billion. Analysts had been expecting revenue of almost $3.71 billion.

THE BIG PICTURE: Apollo said its results were hurt by a double-digit decrease in student enrolment. The University of Phoenix's enrollment fell 17 percent to 287,500 students. New student sign-ups dropped almost 25 percent, to 38,900.

When the Great Recession began, for-profit education companies saw a boom in students as people went to school to improve their job prospects. But demand has faded as the schools have come under increased scrutiny and additional federal regulations.

Meanwhile, the company has focused on cutting costs. Apollo said it expects to cut at least $300 million in expenses by the end of this fiscal year. It's aiming to have cut $400 million in annual expenses during 2014, compared with fiscal 2012.

THE ANALYSIS: Deutsche Bank's Paul Ginocchio backed his "Hold" rating and $16 price target for the stock. Ginocchio said that while he thinks that there is value in the company even with a much smaller University of Phoenix, expectations for fiscal 2014 need to become more realistic and enrolment needs to stabilize before he will recommend picking up shares.

Stifel Nicolaus' Jerry Herman also backed his "Hold" rating. He said that while he's encouraged by the company's efforts to right-size itself, improve affordability for students and boost the quality of its University of Phoenix brand, there isn't much in the way of the spark to boost shares right now.

THE SHARES: Down $1.65, or 8.5 percent, to $17.73 in midday trading, after dropping as low as $17.66 earlier in the day. Since the beginning of this year, the company's shares have lost about 15 percent of their value.