Is Bill Ackman Shooting Down This Education Stock?

Apollo Plummets On Rumors Of Ackman Short
By: Bill Ashton
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Apollo Education Group Inc.’s (APOL) CEO certainly did not get much time to relish the increase in the company's share price seen in early April. The company had reported profits of 28 cents per share in the second quarter of its 2014 fiscal year (2QFY14; ended March 31, 2014), beating the consensus estimate by 45%. It had followed the earnings release with the announcement that it is acquiring South African Milpark Education in mid-May. However, the University of Phoenix parent closed down 9.34% at the end of trading on Thursday on rumors that Ackman had decided to short the company’s stock.

Apollo saw its trading volume go up to 11.204 million yesterday – nearly six times as high as its 15-day simple moving average level of 1.672 million – on rumors that Pershing Square Capital Management LLC had taken a short position in the stock.


Ackman is closely followed by traders for his investment insights. However, the hedge fund manager has also made a number of blunders, including backing JC Penney Company, Inc. (JCP) and its former CEO, and shorting Herbalife Ltd. (HLF). Herbalife has soared 69% since Ackman sold the stock short on December 20, 2012.

Apollo stock went up 30.8% in the first three months of 2014, outperforming all competitors except Strayer Education Inc (STRA), which went up 41% in the same period. ITT Educational Services Inc (ESI) was down 15% and Bridgepoint Education Inc (BPI) shed 7% of its value during the quarter.

Apollo also outperformed the S&P 500 Index, which was up 2.9% in the same period.

The company, which has a turnaround plan in place, may see revenues go up as costs decline. As of now, though, we bring you a list of reasons why Ackman may have thought it a smart move to short the stock.

Declining Enrollment

The 2008 recession brought with it a golden opportunity for non-traditional educational institutions to realize a surge in enrollments and revenues. The University of Phoenix – which generates over 89% of Apollo Education Group’s revenues – posted 23% growth in enrollments in 2008, with revenues rising 26% on a YoY basis. New-student enrollments increased 4% YoY in 2009; however, revenues increased 25%, which was indicative of the fact that students were committed to programs that lasted for longer than a year.

However, the student enrollment rate began to fall as the economy showed signs of recovering. The unemployment rate fell, and student enrollment noted subsequent declines. Revenues, as a result, dropped in the red in 2011.

Apollo Education will need to cut tuition fees at the University of Phoenix in order to increase enrollment and possibly see a revenue increase; however, this route could put the university at risk of violating the 90/10 rule.

90/10 Rule

The 90/10 rule, passed in 1992, states that for-profit colleges will not receive more than 90% of their revenues from Federal Title IV funding. Apollo has steered clear of the limit so far, but was close when it reached 83% in FY13. A further increase could become an issue, and if the limit is surpassed for two years in a row, the company would be barred from Title IV funding.

Default Rates

The gainful employment regulation mandates that universities provide information to students about a program’s success in leading to a job. The University of Phoenix, however, has noted that its cohort’s default rate has continued to rise as graduates of the university have apparently found it difficult to find jobs.

Online Education

University of Phoenix has seen the levels of growth achieved between 2008 and 2010, rapidly diminish, as developments in online education allowed not-for-profit traditional universities to become increasingly competitive with their online-degree programs.


Apollo has maintained a debt-to-equity ratio of 61% in 2013, which is higher the industry average of 22.7%. On the other hand, its competitor, DeVry Education Group, had a debt-to-equity ratio of zero, while ITT maintained the ratio at 24.6% in the same year.


Apollo’s Operating Cash Flows

Apollo’s net operating cash flows (CFOs) fell by 27.3% YoY to $64.89 million in its recently concluded quarter, lower than the industry average of $69.02 million. In contrast, DeVry Education Group had cash flows of $150 million, while ITT Education maintained the same at $60.96 million.

Return On Equity

Apollo’s return-on-equity (ROE) fell from 39.9% in 2012 to 24.2% in 2013. The company’s return-on-assets fell from 13.7% in 2012 to 8.4% in 2013. Bloomberg’s one-year forward projections indicate that Apollo’s ROE could fall further to 17.23% in FY14, which would be lower than the industry average of 19.53%.

Industry Decliners

For-profit education stocks fell across the board as news that Ackman may short Apollo Stock shook the education industry, which is already wrought with issues like declining revenues, high default rates, and increased government regulatory scrutiny.

Shares of ITT Educational Services tumbled 24% to $19.50 on Thursday, as the company announced that it is awaiting SEC’s decision as to whether the results of a “variable interest entity involved in a private loan program” should be incorporated in the company’s results. ITT withdrew its previously issued guidance estimates, saying that the pending decision could impact results. Furthermore, ITT also announced that its new student enrollment fell 4% YoY in the recently concluded quarter. The company projected that the declines in its new student enrollment may increase by another 10-15% YoY in the ongoing quarter.

Strayer shed 4% to close at $56.81, while Bridgepoint Education declined 2.9% to end trading at $13.99. DeVry Education Group lost 2.5% to close at $43.49 per share.

Sell Side Estimates

Apollo is trading at an 18.4% premium to its own three-year average price-to-earnings multiple. There is a possibility that the company’s share price may fall going forward, as its earnings for 2014 are expected to decline 27%.

Out of the 17 analysts covering Apollo stock, five recommend a Buy and 10 advise investors to Hold. The average target price comes out to $33 per share, higher than yesterday’s closing price of $27.31 apiece. There is a possibility that a short position, if taken in the company’s stock, will cause analysts to revise their estimates, which may bring down the target price going forward.

Care to respond to our views on Apollo and Ackman? Utilize our comments section, and our analysts will get back to you.

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