A disappointing earnings release from Strayer Education (Nasdaq:STRA) earlier on Monday sent the share prices of many for-profit educators down early in the day, but Apollo Group (Nasdaq:APOL) helped sentiment improve by posting impressive first-quarter results for its flagship University of Phoenix private education brand. As the largest player in the space, the firm serves as the industry bellwether and is in cost-savings mode until sales trends improve, which likely won't be for a couple of years.

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First-Quarter Update
Net revenue improved 5.4% to $1.3 billion and was attributed to "elective tuition price increases." Total enrollment declined 3.8% to 438,100 students as new degreed enrollment plummeted 42.4%. This was largely expected because the industry is looking to improve graduation rates and faces criticism for the quality of its classes and debt burden that students are bearing. Apollo also began offering an orientation program to its students and detailed a focus on "shifting the mix of enrollment to more experienced students who have a greater likelihood of succeeding in the Company's programs," which has hurt enrollment trends in the near term.

With the more muted top-line growth, the company has looked to control costs. Total costs and expenses rose only 6.2% during the quarter and resulted in only modest sales deleveraging as operating income rose a modest 3.7% to $407.1 million. This also represented a still-impressive operating margin of nearly 31%. Higher interest expense pushed net income down 2% to $235.4 million, but share repurchases helped push earnings up 4.5% to $1.61 per diluted share. This beat analyst projections by a fairly wide margin.

Outlook
The company has stopped providing specific sales or profit guidance for the time being, but generally said it expected increasing declines in enrollment as the year progresses. It isn't sure when enrollment trends start improving but is staying focused on controlling costs until they do. Analysts currently project a full-year sales decline of almost 6% to $4.6 billion and earnings of $4.38 per share. (For related reading, take a look at Can Earnings Guidance Accurately Predict The Future?)

Impressive Profits
Operating cash flow also held up well during the quarter, growing 2.2% to $414 million. The company increased capital expenditure by nearly 35% to $50.6 million, which sent free cash flow down to $363.3 million, or roughly $2.48 per diluted share. But again, Apollo remained impressively profitable and generates far more capital than it needs to maintain and grow its business.

Bottom Line
At a forward P/E of under 10, Apollo continues to look like an appealing investment. It is much larger than rivals including Strayer, Career Education (Nasdaq:CECO), Corinthian Colleges (Nasdaq:COCO) and ITT Education Services (NYSE:ITT), and remains profitable in a challenging operating environment. The industry continues to face quite a bit of uncertainty, but Apollo stands among the best chances of making it through a difficult period with its business model intact. At the current valuation, the downside risk appears low.


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Tickers in this Article: APOL, STRA, COCO, ITT, CECO

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