Apollo Group Aces Earnings As University of Phoenix Enrollment Skyrockets

Shares of Apollo Group Inc. (APOL) rose as much as 6.1% Monday after the operator of for-profit educational institutions beat analyst expectations when it reported Q2 earnings before the bell.  The Phoenix, AZ-based company, which is probably best known for the institution that bears the name of its base of operations, The University of Phoenix, reported EPS of $0.84/share, excluding a charge related to a class-action lawsuit, on revenue of $1.07 billion.  Consensus estimates called for EPS of $0.81/share on revenue of $1.07 billion.  Revenue was up 23% year-over-year.

The primary driver behind the earnings beat was better-than-expected enrollment numbers, as APOL saw its ranks swell in both online and in-person programs.  Indeed, considering that unemployment numbers have yet to retreat in any material way, one would expect companies like APOL to thrive.  For one example, enrollment at its flagship asset, The University of Phoenix, rose 15.3% YOY, including a 9.4% increase in new student enrollment.  However, such increases in enrollment have some analysts worried, as an increased student-pool exposes APOL to greater bad-debt expenses.  Bad debt rose to 6.9% of revenue during Q2, up from 4.1% for the same Q last year, as tough economic times have led to lower collection rates.

CEO Charles Edelstein commented that total enrollment could have been up as much as 19% if the company had not increased its admissions standards to avoid taking on too much debt-risk.  Edelstein does feel, however, that bad debt will be controlled in future quarters.  This was reflected in his Q3 guidance of $1.55/share  on revenue of $1.3 billion, which came in solidly ahead of consensus estimates, which were looking for $1.45/share on $1.28 billion.

Another risk that will hang over APOL’s head for some time is the aforementioned class-action lawsuit, for which the company took a $45 million charge during Q2.  The charge was meant to reflect a rough expectation of the actual settlement amount, which in reality can range anywhere from $0 – $225 million.  APOL actually won the initial action, but the case has been appealed.  The final ruling has yet to be levied, but APOL felt it was appropriate to take the charge now.

APOL closed at up 3.07% Monday and remained flat after-hours.  Shares are actually at a very interesting spot at the moment, as they just tested, and did not break, resistance at around $65 for the fifth time since November.  While I like the story behind the name, I wouldn’t begin to pick up any shares until I saw a breakout, ideally on high volume.  I thought we would get that day today, but alas, it was not meant to be.

If you’re interested in gaining some exposure to the sector, wait for a close above $65 and a follow through day thereafter, solidifying APOL’s position above resistance, and remember to always use a stop.  As Fast Money Commentator Guy Adami said in his exclusive interview with Wall St. Cheat Sheet last week, the number one mistake traders make is not cutting a losing position before it becomes a gaping hole in their portfolio.  I recommend keep your stops at no greater than 10% below your initial buy-point.

Disclosure: No holdings in APOL.