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Apollo Group, Inc. (APOL). Analyst: Will Hippler. About the Company. Apollo Group is an Educational Services Company. It owns several popular subsidiaries, through which it offers college-level educational services. Its main focus is working adults. Apollo Group ’ s subsidiaries include:

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apollo group inc apol

Apollo Group, Inc. (APOL)

Analyst: Will Hippler

about the company
About the Company
  • Apollo Group is an Educational Services Company. It owns several popular subsidiaries, through which it offers college-level educational services.
    • Its main focus is working adults.
  • Apollo Group’s subsidiaries include:
    • The University of Phoenix and its online component,
    • Western International University,
    • The Institute for Professional Development
    • The College for Financial Planning.
      • Combined, Apollo Group operates 90 campuses and 154 learning centers in 39 States, Puerto Rico and Canada. The company boasts an enrollment of over 300,000 students. (Annual Report, MSN)
  • Apollo Group divides its operations into two operating segments within the educational services market:
    • The University of Phoenix segment
    • The Other Schools segment
  • Some of Apollo’s main strategies over the past several years have been to maximize asset allocation, while minimizing tuition and increasing educational quality.
about the company3
About the Company
  • Company Strengths
        • Revenues are expected to grow an average of 9.5% per year from 2007 to 2010. (Value Line)
        • Net Income and Earnings per Share are both expected to grow at around 11% per year from 2007-2010. (Value Line)
        • Brands like the University of Phoenix give Apollo Group assets with good name brand recognition within its market.
        • Over $400 Million in yearly net income, $1.3 Billion in total assets and no debt should make Apollo Group a financially durable company
        • Focus on one industry allows company to develop expertise in the industry.
        • Apollo Group is able to significantly benefit from the increased trend in both college enrollment and enrollment among adults and professionals.
        • College enrollment among professionals, especially online, will likely to continue to grow.
  • Company Risks
        • The company always faces competitive risk from other institutions.
        • Other institutions are developing Associate Degree, working professional, and online educational opportunities of their own, which threaten Apollo Group’s enrollment.
        • Apollo Group has seen a recent slowdown in enrollment to their physical campuses.
        • The company has a significant Federal case outstanding involving its stock option plan.
        • The company faces some risk as it expands its services to include new locations both within the United States, as well as internationally, such as Mexico, India, and China.
        • Because the company is focused on one industry, it assumes the risks of that industry.
        • A slowdown in the educational services area would dramatically affect Apollo’s earnings.
        • The company’s long experience, name recognition and strong financials mitigate this somewhat.
industry analysis
Industry Analysis
  • Growth Rates
      • Apollo Group has shown surprisingly slow Revenue and EPS growth recently, which are 5.6% and 1.9% respectively.
      • Apollo’s 5 year revenue growth is strong, however. At about 30%, it is the strongest in the industry.
  • Financial Condition
      • Neither Apollo Group, nor its main competitors have any significant debt.
  • Profit Margins
      • Gross Margin for Apollo is among the highest in the industry at 57%.
      • Apollo’s net margin is also high at 18.4%.
      • At 17.3%, Apollo’s 5 year average profit margin is high.
  • Investment Returns
      • Apollo has a ROE, ROA and ROI of 72.1%, 36.6% and 64% respectively. These returns beat competitors by a significant margin.
  • Valuation Ratios
    • Apollo Group’s Current P/E of around 19.7 is lower than most of its best performing competitors.
  • Its closest competitors performance-wise are Ambassador’s Group (EPAX), ITT Technical Services (ESI), Strayer Education, Inc. (STRA), and Universal Technical Institute (UTI). Apollo Group’s P/E, however, is below almost all of its best performing competitors.
valuation
Valuation
  • Ouma Summary:
  • It is estimated that Apollo Group’s intrinsic value is $68. This is based on a future expected P/E of 24.
  • It is believed that this P/E is reasonable given Apollo’s past performance, current operations, and future expected performance.
other factors and summary
Other Factors and Summary
  • Other Factors
    • The Wilson Fund does not currently hold securities from the Educational Services Industry. Adding a stock from this industry would add to the diversity of the Wilson Fund, and somewhat reduce the overall risk of the Fund.
    • Slow recent EPS growth and the recent news over federal court inquiries into Apollo’s options program could present a buying opportunity.
    • The slow recent revenue and EPS growth could be a warning that Apollo may not perform as expected over the next 5 years.
  • Summary:
    • Apollo Group faces strong competition from other companies in its industry.
    • It also operates entirely within the educational industry, so it is susceptible to a large amount of single industry risk.
    • However, Apollo’s experience and good financial status mitigate these risks.
    • Lower P/Es, slower revenue growth and federal litigation are all factors that have kept APOL price down.
    • However, this situation is not consistent with most expectations of the company’s future.
    • It is likely that Apollo’s strong presence and focus within its industry, combined with ever increasing demand for college-level training, will cause Apollo to have strong earnings in the future.

At a P/E of 24, and an EPS growth of about 11% per year, APOL is valuated at $68. A Margin of safety price of $47-$50 is recommended.