American Public Education Misses

American Public Education Inc. (APEI - Analyst Report), an online provider of higher education to military and public service communities, recently delivered lower-than-expected first-quarter 2011 earnings due to higher costs and expenses. The quarterly earnings of 43 cents a share missed the Zacks Consensus Estimate of 45 cents, but rose approximately 8% from 40 cents earned in the prior-year quarter.

Management now projects second-quarter 2011 earnings between 43 cents and 46 cents a share that remains below the current Zacks Consensus Estimate of 48 cents. Following management’s projection, a negative sentiment may be palpable among the analysts and we could witness a fall in the Zacks Consensus Estimates in the coming days.

Total revenue of $58.7 million came ahead of the Zacks Consensus Estimate of $57 million, and soared 24% from the prior-year quarter. American Public Education forecast revenue growth of approximately 28% for second-quarter 2011.

Total net course registration surged 31% to approximately 81,100, and net course registrations from new students grew 37% to approximately 17,800. American Public stated that about 90,600 students were enrolled in the American Public University System as of March 31, 2011, reflecting an increase of 33%.

Management now expects second-quarter 2011 net course registrations to jump approximately 25%, and net course registrations from new students to rise approximately 27%.

American Public Education has predicted a growth in student enrollments for the second quarter, despite the regulation proposed by the Department of Education that may weigh upon students’ enrollments and the company’s profits.

The Department of Education cited that an educational program could qualify for Title IV funds only if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios. The company derives a major portion of its revenues from federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.

A for-profit education company, Capella Education Company (CPLA - Analyst Report) cautioned that new enrollment in second-quarter 2011 could plunge 40%. To counter sluggishness in students’ enrollment, education companies are restructuring their cost base. Capella said that it lowered its headcount by about 120 non-faculty workforces and incurred a charge of about $1.9 million for the same in the quarter. Management hinted that the eliminations will result in cost savings of approximately $12 million to $12.5 million per year.

Coming back to American Public Education, first quarter operating income remained flat year over year at $13.1 million, but operating margin contracted 550 basis points to 22.3%.

American Public Education ended the quarter with cash and cash equivalents of $96.5 million, and no long-term debt. For the quarter, capital expenditures were $3.6 million and cash from operations was $19.9 million.

Currently, we have a long-term “Neutral” rating on the stock. Moreover, American Public, which competes with Apollo Group Inc. (APOL - Analyst Report), holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.