American Public Education, Inc.’s (APEI - Analyst Report) fourth-quarter 2013 earnings of 51 cents per share missed the Zacks Consensus Estimate of 54 cents by 5.6%. Earnings also declined 31.1% year over year due to military enrollment hurdles and higher costs. Earnings were near the lower end of management’s expected range of 50 to 54 cents.
Revenues and Enrollment Details
American Public is the parent company of online learning provider American Public University System (APUS) and campus-based Hondros College, Nursing Programs which was acquired in November last year.
Total revenue declined 4% year on year to $82.9 million, slightly better than management’s expectation of decline in the range of 5–9%. Revenues also beat the Zacks Consensus Estimate of $81.0 million by 2.3%. We believe the top-line beat was only due to the inclusion of $3.8 million of revenues from Hondros. The APUS revenues were lower than expected due to weaker enrollment trends.
Total enrollment at APUS declined 9% year over year to 95,400, worse than the company’s guidance of decline in the range of 3% to 7%. New student enrollments (student starts) at APUS declined 10% to 20,300, also worse than management’s expectation of a decline in the range of 5% to 9%.
Enrollments in the fourth quarter were adversely impacted by decline in enrollments of students using Department of Defense (DoD) Tuition Assistance or TA benefits. The temporary suspension of the TA due to the government shutdown in Oct 2013 and lowering of the benefits by the military greatly hurt enrollments by military students.
In the quarter, net enrollments of students using DoD tuition assistance programs decreased 35% year over year. Excluding military students, the metric grew 6% as enrollment rates of civilian and non-military students remained stable.
Total enrollments of students using cash or other source increased 2% in the quarter. Net enrollments of students using Title IV funds increased slightly less than 1% year over year, and net course registrations by students using veterans benefits were up 28% year over year.
Total enrollments at the newly acquired Hondros rose 13% in the quarter to 1,330 students.
Margins Weak as Costs Increase
Operating income for the quarter declined 32% year over year to $14.5 million due to higher costs. Selling and promotional (S&P) expenses as a percentage of revenues increased 140 basis points (bps) to 20.6% of revenues due to American Public’s increased online marketing efforts, negative operating leverage and additional staff costs. Instructional costs and services increased 50 bps to 35.0% of revenues due to lower revenues.
Further, bad debt ratio increased 100 bps in the quarter to 4.6% due to a change in student mix to a higher percentage of civilian students.
First-Quarter 2014 Outlook Soft
Management expects continued military enrollment hurdles in the first quarter of 2014. New enrollments by students using TA benefits are expected to decline again in the first quarter due to ongoing budgetary constraints and uncertainty. Management warned that new enrollments by these students have already declined in a mid-teen percentage so far in the quarter. However, civilian student starts are expected to increase year over year.
Considering these factors, management expects first-quarter 2014 total enrollments to decline in the range of 5% to 7% while student starts are expected to go down in the range of 7% to 9%. American Public expects revenues to remain in the range of flat to an increase of 3%. Management further projects first-quarter 2014 earnings between 43 to 48 cents, which marks a significant decline from prior-year level. The earnings guidance is also well short of the Zacks Consensus Estimate of 71 cents.
Management also stated that new student enrollments at Hondros College increased 45% in first-quarter 2014.
In fiscal 2013, the company witnessed 5% increase in revenues to $329.5 million, slightly above the Zacks Consensus Estimate of $328 million. Adjusted earnings per share of $2.35, however, missed the Zacks Consensus Estimate of $2.39 by 1.7%. Earnings were flat year over year.
Other Stocks to Consider
American Public carries a Zacks Rank #3 (Hold). Better-ranked stocks in the education sector include Strayer Education, Inc. (STRA - Analyst Report), New Oriental Education & Technology Group Inc. (EDU - Snapshot Report) and Apollo Education Group, Inc. (APOL - Analyst Report). While Strayer sports a Zacks Rank #1 (Strong Buy), Apollo Education and New Oriental Education have a Zacks Rank #2 (Buy).