One of the most dangerous investment plays for value-oriented investors is an apparently cheap stock of a company that is seeing a serious and significant reordering of its business and industry. That covers for-profit education company Apollo Group (Nasdaq:APOL) rather well, and I admit that I got sucked into what looked like a low valuation combined with a quality company built to last. The stock is down almost one-third since my late January optimism, and though the long-term outlook for the company is still solid, it's clear that this story is going to take time to work.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers

Fiscal Third Quarter Results Aren't all That Strong
While Apollo Group did surpass analyst expectations for its fiscal third quarter, that doesn't mean the results was strong. Revenue fell 8.5% and the company saw a double-digit decline in enrollment (down 13%) and an 8% reported decline in new starts (while underlying new starts were down about 5%).

Profitability was also much lower. Apollo Group is increasing its spending on student advisory and career counseling services, and instructional/advisory costs increased almost 3% from last year despite the lower enrollment figures. That pushed gross margin down four and a half points, while operating income fell by one-third.

SEE: Zooming In On Net Operating Income

GE Data not Likely to Matter Much
The Department of Education released its gainful employment (GE) data early Tuesday morning, and the data seems broadly positive for the sector. Education Management (Nasdaq:EDMC) has already pointed to what it believes are errors in the data (inaccurately low debt levels), and it's probable that analysts and companies are going to find additional objections. That said, for companies like DeVry (NYSE:DV), Education Management and ITT Educational Services (NYSE:ESI), the data is at least a "no bad news is good news" situation.

For Apollo, the data doesn't really matter all that much. Analysts expected the company would be in good shape, and it looks like there was only one problematic program out of the 100 or so that was part of the evaluation.

When will the Growth Return?
Clearly there has been a big shift in the for-profit education industry. While some may point to the scandal and kerfuffle over poor graduation, employment and debt repayment rates (which spurred a widely-publicized government investigation), I don't know if many prospective students paid close attention to that.

What I do think is relevant is the high unemployment rate, the resistance of some banks to issue student loans and the growing skepticism about the value of for-profit degrees. Unemployment may offer up the time to take classes, but it takes away income and also the confidence that investments in career development are worthwhile. Moreover, I suspect that a lot of for-profit education is undertaken with an eye towards promotion and improved earnings potential as opposed to finding a job.

Whatever the case, enrollment rates are not good in the industry. That could play well for American Public Education (Nasdaq:APEI) with its orientation towards the military and its low tuition costs, and perhaps Grand Canyon Education (Nasdaq:LOPE) with its greater focus on nursing and healthcare (which has seen lower job loss in the recession). I'll also be curious to see how this works out for Universal Technical Institute (NYSE:UTI); this stock is not well-liked by sell-side analysts and analysts have been coming down, but I wonder if a company that skews younger will do better.

SEE: Student Loans: Loan Repayment

The Bottom Line
The boom in for-profit education is certainly past, and it remains to be seen whether the industry will yet need to go through a wringing-out process where companies close up shop or pursue survival-by-merger strategies. Certainly there is no shortage of programs and providers out there.

I still believe that Apollo Group will be one of the survivors, but its status as the largest company may make sector-leading growth more difficult. Improving employment and worker confidence would help enrollment, but it looks like 2012 is going to be another year of readjustment and reestablishing expectations for the "new normal."

These shares still look cheap, but then they did 15 points ago as well. Certainly these are not shares for the risk-averse, but even low single-digit free cash flow growth would suggest that these shares offer above-average potential over the long term.

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  3. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  4. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  5. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  6. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  7. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  8. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  9. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  10. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!