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On Feb 14, we maintained a Neutral recommendation on leading private education service provider, Apollo Group Inc. (APOL - Analyst Report), following appraisal of its first quarter fiscal 2013 results. The company also carries a Zacks Rank #3 (Hold).

Why the Neutral Recommendation?

Apollo Group’s first quarter fiscal 2013 earnings as well as revenues beat the Zacks Consensus Estimates on the back of better-than-expected cost savings and lower-than-expected enrollment decline at the University of Phoenix. However, earnings dropped 3.2% year over year to $1.22 due lower revenues. Apollo Group’s net revenue declined 10% in the quarter.

Total enrollments at Apollo’s flagship university, University of Phoenix declined 14.3% in the quarter. Apollo Group has been witnessing persistent decline in enrollment due to the weak macroeconomic environment and subsequent decline in demand for education (due to the hesitancy over taking a loan) in the U.S. Encouragingly, however, new enrollment declined 15.1% in the quarter, which bettered the company’s expectation of a decline of 17%.

However, management slightly reduced its previously provided expectations for fiscal 2013 revenue and profits due to planned increases in student discounts and marketing costs; and soft enrollment trends in December.

Despite the earnings and revenue beat in the first quarter, estimates mostly moved downwards due to the cut in the financial guidance. The Zacks Consensus Estimate for 2013 has gone down by almost 4% to $2.66 while that for 2014 has reduced by 12.8% to $2.53 over the last 60 days.

Overall, we like Apollo Group’s dominant market position as well as its efforts to address the challenges and improve business over the long term. Apollo’s initiatives include investments in adaptive learning, curriculum development, new learning systems and student service platforms; and initiatives to connect education to careers.  Apollo also has plans for significant layoffs and campus closings in fiscal 2013 to turnaround its business and become more competitive.

Though new enrollments have shown slight improvement, we believe new student starts will take several more quarters to show a sustained recovery and are expected to become positive only by the end of fiscal 2013. Thus the volatile enrollment trends and possibility of regulatory changes keep us on the sidelines.

Other Stocks to Consider

Some other education companies worth a look are American Public Education, Inc. (APEI - Analyst Report) – Zacks Rank #1 (Strong Buy), DeVry, Inc (DV - Analyst Report) - Zacks Rank #2 (Buy)  and Grand Canyon Education, Inc. (LOPE - Snapshot Report) -  Zacks Rank #2 (Buy).

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