We maintained a Neutral recommendation on American Public Education, Inc. following appraisal of fourth quarter and full year 2011 results.
American Public Education recorded earnings of 71 cents per share in the fourth quarter, beating the Zacks Consensus Estimate by 11 cents. Earnings were also above the prior-year figure of 52 cents due to robust top-line growth and a low tax rate. Total revenue of $75.7 million surged 34% from the prior-year quarter, and also came in ahead of the Zacks Consensus Estimate of $73 million. The top-line growth was driven by robust student enrollments, particularly from civilian students.
American Public Education is one of the leading online providers of higher education focused primarily on serving the military and public service communities. The company’s students can finance their education through tuition assistance programs of the US Armed Forces (DoD tuition assistance programs), education benefits administered by the Department of Veterans Affairs, and federal student financial programs referred to as the Title IV programs.
More than 50% of the company’s students serve in the US military. The company’s courses have been specifically designed to suite online studies and the faculty has also been specially trained for online teaching. Online programs are well-suited for the unpredictable and demanding work schedules of military personnel who are required to travel and relocate frequently and have limited financial resources.
American Public Education’s tuition costs are not only below most private school tuition costs but also 20% below the average in-state tuition costs for public universities. The company’s undergraduate courses cost $250 per semester credit hour, which has remained unchanged since 2000. Graduate courses cost $325 per semester hour. A full undergraduate degree would cost $30,250 whereas a graduate degree would cost around $12000 for military students. The affordability of the company’s courses and programs will benefit it in the long run due to increasing price sensitivity among students in this challenging economic environment.
Besides, American Public Education is gradually shifting its focus from military personnel to public service segments of the civilian market. In 2011, the company witnessed significant growth in enrollment by civilian students partly due to the attractiveness of the Title IV funds as well as the affordability of the courses offered. Though shift in student mix to civilians would result in higher selling and promotional costs and bad debts, it bodes well for the company’s long-term growth as these students generally take more classes than military students and show higher retention rates.
As a caveat, the company’s DoD tuition assistance programs and the Title IV federal aid programs are subject to stringent regulations by the Department of Education and accrediting agencies recognized by the Secretary of Education. The regulations and policies of the Department of Education, state education agencies, and the accrediting agencies change frequently.
The educational institutions are also under the scanner due to the rise in abuse of funds, mostly by civilian students who use the balance fund (fund is usually more than American Public Education’s tuition costs) to meet living expenses. The company is taking steps to reduce student abuse of the Title IV Funds and thereby improve student outcomes. However, such efforts increase costs and hurt margins.
At the fourth quarter and 2011 conference call, management announced that active duty military students represent an increasingly smaller portion of the overall population. Management believes that military enrollment will continue to be volatile and possibly decline going forward due to possible reductions in US army, marine and sales force personnel. Defense budget cuts are high on priority, which will also affect student enrollments and funding. We therefore prefer to remain on the sidelines without taking any new positions in the stock.