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We recently reverted back to a Neutral recommendation on American Public Education, Inc. (APEI - Analyst Report) from Outperform due to weak new student starts in the fourth quarter of 2012. American Public Education carries a Zacks Rank #3 (Hold).

Why the Downgrade?

Even though, American Public beat the Zacks Consensus Estimate for revenues and earnings in the fourth quarter of 2012, its new student starts were weak and operating margins declined in the quarter. American Public, an online provider of higher education, released its fourth quarter of 2012 earnings results on Feb 28.

New student enrollments declined 8% in the quarter, higher than management’s expectations of a 3% to 7% decline. Management believes that the company’s fraud prevention initiatives are reducing enrollment of students who abuse funds, which explains the decline in new student starts for the quarter.

Moreover, the company also provided a bleak outlook for student starts in the upcoming quarter. We believe the declining trend of new student starts could eventually impact total enrollment in future quarters.

Operating margins also declined in the quarter by around 130 basis points to 25% due to the company’s increased marketing efforts, which resulted in higher selling and promotional expenses.

A tough regulatory environment also remains a persistent overhang.

Despite the fourth-quarter beat, estimates have mostly moved downwards for 2013 and 2014.  The Zacks Consensus Estimate for 2013 moved down by 1.9% to $2.58 and 7.0% to $2.80 for 2014 over the last 60 days.

Stocks That Warrant a Look

Stocks such as Shutterfly, Inc. (SFLY - Analyst Report), Zillow, Inc. (Z - Snapshot Report) and Giant Interactive Group, Inc. are currently performing well and are worth considering. Shutterfly and Zillow carry a Zacks Rank #1 (Strong Buy), whereas Giant Interactive holds a Zacks Rank #2 (Buy).  

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