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On Apr 30, we maintained a Neutral recommendation on the private education service provider, Apollo Group Inc. (APOL - Analyst Report). Though the company delivered better than expected results in the second quarter of fiscal 2013, enrolments continued to struggle. Apollo currently carries a Zacks Rank #3 (Hold).

Why the Neutral Recommendation?

On Mar 25, 2013, Apollo announced the second-quarter fiscal 2013 results. Second-quarter earnings of 34 cents per share beat the Zacks Consensus Estimate by almost 89%. Apollo Group’s revenues also beat the Zacks Consensus Estimate by 1.6%.

We believe that both the earnings and the revenues beat the Zacks Consensus Estimates on the back of lower-than-expected discounts/grants. However, earnings dropped 40.4% year over year due to lower revenues and higher advertising costs. Revenues declined 13.3% as new student starts remained weak, declining 20% in the quarter. Moreover, the company saw continued soft start trends in March and expects the new student starts to continue to decline in the third quarter as well.

Overall, we are positive about Apollo Group’s dominant market position as well as its efforts to address challenges and turn around its business and become more competitive, going ahead. Apollo’s initiatives include investments in adaptive learning, curriculum development, new learning systems and student service platforms; initiatives to connect education to careers; and significant layoffs and campus closings. Though encouraged by these initiatives, continued weak new-enrollment trends and the possibility of regulatory changes keep us on the sidelines.

Other Stocks to Consider

Some other education stocks that are currently doing well include ChinaEdu Corporation , New Oriental Education & Technology Group (EDU - Snapshot Report) and K12, Inc (LRN - Snapshot Report), all carrying a Zacks Rank #2 (Buy).

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