Tickers in this Article: APOL, DV, EDMC, STRA, COCO, ESI, CECO
These are challenging days for the for-profit education market. Although a tough job market may suggest a larger pool of potential students, education companies are up against a formidable set of challenges. Education has gotten increasingly expensive (pricing some out of the market), the job outlook may lead people to think further education is pointless, and new government regulations have these companies reconsidering and adjusting their admissions and promotions policies.

TUTORIAL: Education Savings Account

With that backdrop, it is not altogether surprising that Apollo Group (Nasdaq:APOL) is struggling. While the long-term view on this company is still quite positive, the institutional investors that move markets these days are not famous for patience and the near-term outlook is troublesome.

A Tough Third Quarter
Apollo did reasonably well, relative to expectations, but the company's absolute fiscal third quarter performance was not very strong. Revenue fell close to 8% this quarter, as starts dropped about 40% and enrollment fell about 16%. Apollo saw the biggest drops in its associate programs, but there really wasn't an area of strength. While these declines were already in the analysts' models (and caused at least in part by new orientation and admissions models), it is still a major interruption in the company's growth trajectory.

With the decline in revenue, Apollo saw a significant decline in operating leverage. Operating margin drop by five full points. On a more positive note, bad debt expense was down on both a sequential and annual basis, and the company was in pretty good shape relative to government requirements and metrics. (Even a rough idea of a firm's operating leverage can tell you a lot about a company's prospects. For more, see Operating Leverage Captures Relationships.)

What's the New Normal?
Clearly these are new days for companies like Apollo and its rivals DeVry (NYSE:DV), Education Management (Nasdaq:EDMC), Strayer (Nasdaq:STRA) and Corinthian Colleges (Nasdaq:COCO). With new rules regarding student debt loads, after-graduation earnings, and so on, companies have to be more careful about who is admitted, what they charge and how well their programs meet the needs of employers. That, in turn, has led many of these companies to reconsider their advertising, orientation and enrollment policies and that is going to impact student enrollment for a time.

On the other hand, there seems to be plenty of reason to think that these companies have a bright future. There have been plenty of stories lately about the "skills gap" in the American economy - companies have job openings, but they cannot find candidates with the necessary skills. Now in a free market economy with education and training opportunities available, it would seem like that skills gap should be a good opportunity for the DeVrys, ITT Educations (NYSE:ESI) and Career Education (Nasdaq:CECO).

The trick, though, is "how" and "when". In the near term, there's going to be turbulence in new student enrollment and maybe some pressure on tuition levels as well. By and large, growth investors are not a patient bunch nor a group that is interesting in waiting out near-term turbulence, so even though there is growth potential in this group these stocks may need some time to work. (For related reading, see Is Growth Always A Good Thing?)

The Bottom Line
Apollo Group is in good shape, relative to the new Department of Education standards, and the company's large physical presence should be a positive for the company in the future. On top of that, the company has a pretty decent brand and a good reputation with employers, compared to other for-profit programs. While the next couple of years are likely to be tough with respect to revenue and free cash flow growth, patient value-oriented investors have good reason to expect solid multi-year rewards from the current stock price level. (These quick and dirty ratios will help you find the most undervalued stocks on the market. For more, see 5 Must-Have Metrics For Value Investors.)

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