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Apollo worries weigh down entire sector

The Associated Press

Apollo Group Inc. shares sank Wednesday after the for-profit education company said that enrollment at the University of Phoenix declined for yet another quarter, issued a disappointing revenue forecast for the year and disclosed a potential accreditation issue. The news sent shares down across the industry and made Apollo's shares the top decliners in the S&P 500.

The company, whose stock had already lost more than 60 percent of its value over the past 12 months, fell more than 7 percent by midday.

Apollo and other for-profit educators enjoyed a big boom in enrollment when the recession first hit, but student demand has faded. Increased criticism of the schools, new federal regulations and the still-struggling economy, which limits consumers' ability to spend, have weighed on enrollments. That, in turn, has hurt revenue and profitability across the sector.

Apollo said in October that it was closing 115 of its smaller locations to cope with lower enrollment and plunging profits. Then it reported Tuesday after the market closed that enrollment at the University of Phoenix fell 14 percent in its fiscal first quarter. New student sign-ups fell 15 percent, worse than in the previous three months.

It also said that the Higher Learning Commission, its accrediting body, is sending the company a draft report that will include a recommendation to put the University of Phoenix on "notice status" due to several areas of concern. Apollo hadn't seen the report yet but said it will have a chance to review and respond before any final decisions are made. Accreditation is necessary for the company to continue to be eligible for student loans, which make up much of its revenue.

Apollo's most recent quarter's profit topped analyst expectations, but Apollo's outlook, still-weak enrollment and other issues raised investor fears that the industry will be stuck in its slump for some time.

Baird analyst Jeffrey Meuler said that the industry needs to improve the perceived value of what it is offering students before it can return to solid growth. The cost versus the benefit isn't appealing to students as much these days and the popularity of online classes is growing. And Apollo and other are discounting tuition through expanded grant programs, but that has hurt revenue forecast.

William Blair analyst Brandon Dobell said that Apollo's management expects that demand to improve in 2013 but gave no specifics on why it is confident in that projection. He remained dubious of the company's potential, given industry issues, numerous false starts in the past and some pending accreditation issues.

Dobell said Apollo would have a dampening effect on the entire sector's stock prices. However, he favors companies such as Grand Canyon and American Public because of their growing enrollment bases, less-expensive tuition and lower fixed costs. He said discounting and demand issues will remain a worry for companies such as Strayer, Capella and Devry, as he believes these schools cannot increase their enrollment without further discounting.

Morgan Stanley analyst Suzanne Stein lowered her rating on the company's stock to "Equal-Weight" on the performance, regulatory worries and weak execution of a restructuring.

Here's a look at how the news affected shares of a number of for-profit education companies by midday Wednesday:

— Apollo Group Inc. shares fell $1.53, or 7.3 percent, to $19.41. Its shares haven't closed at a price this low since 2000.

— DeVry Inc. declined $1.48, nearly 6 percent, to $23.76. Its shares are down nearly 40 percent over the past 12 months.

— Strayer Education Inc. fell $3.65, more than 6 percent, to $53.52. Its shares have lost about half their value over the past 12 months.

— Capella Education Co. fell $1.09, nearly 4 percent, to $28.19. Shares of this volatile stock are currently at the low end of its 52-week trading range of $25.81 to $45.70.

— Grand Canyon Education Inc. fell 95 cents, about 4 percent, to $22.55. Another volatile stock, these shares are near the high end of its 52-week trading range of $15.80 to $25.

— American Public Education Inc. increased 39 cents to $37.42, nudging just ahead of broader market gains. Its shares remain in the middle of their 52-week trading range of $24.88 to $46.96.