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Risk Reward Balanced at Apollo

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We maintained a Neutral recommendation on Apollo Group Inc. following appraisal of fourth quarter and fiscal 2013 results.

Apollo Group’s fourth quarter fiscal 2012 earnings of 52 cents per share beat the Zacks Consensus Estimate by 6.0%. However, earnings dropped 49% from the prior-year earnings of $1.02 due to lower revenues. Total revenue declined over 11% to $996.5 million primarily due to lower enrollments at the University of Phoenix (UOP). New enrollments at UOP declined sharper than the third quarter levels and is expected to continue to contract in the first quarter as well.

Overall, we like Apollo Group’s dominant market position as well as their efforts to address its challenges and improve the business over the long term.

Apollo’s educational programs ensure students can use their educational lessons quickly and effectively in their professional careers. Apollo is also enhancing its technology to ensure that its students have the skills and competencies that employers are seeking for. Moreover, the company is focusing on corporate and community college partnerships to educate their workforce. Apollo has established almost 2000 corporate relationships including some big Fortune 500 companies. The company is seeing good response from this channel, and student retention within this channel is significantly higher than the traditional channels.

The company is also consistently enhancing and expanding its services, and investing in academic quality to improve student experience and outcomes. Apollo’s initiatives include investments in adaptive learning, curriculum development, and introducing a new learning and service platforms.

Apollo also plans for significant layoffs and campus closings in fiscal 2013 to turnaround its business and become more competitive. Under its latest restructuring plan, the company aims to decrease its ground location square footage by closing 115 locations (approximately half of University of Phoenix’s ground facilities) by the end of fiscal 2013, which will dent its student population by approximately 4%. Further, the company expects to decrease total headcount by approximately 800 employees (approximately 5% of total headcount) during fiscal year 2013. Since the beginning of fiscal year 2011, Apollo has reduced its total headcount by approximately 20%, excluding faculty. Management believes that its strategic and cost saving initiatives will result in cost savings of $300 million by fiscal 2014 compared to the 2012 cost base. Half of these savings are expected to be realized in fiscal 2013 with the remainder in fiscal 2014.

Though encouraged by these initiatives, the choppy enrollment trend and possibility of regulatory changes keep us on the sidelines. The company has been witnessing volatile enrollment growth. New enrollment growth is affected by changes in marketing mix, changing regulatory requirements, sluggish demand, robust competition and a volatile economy. The company expects new degreed enrollment growth to continue to decline in the first quarter of fiscal 2013 and become positive only sometime in the second half of next year.

Peer company DeVry, Inc. carries a Zacks #2 rank (short term 'Buy" rating).

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