Sneak Peek Earnings Preview: Apollo Group: Can the Industry Withstand Regulatory Pressure?

June 28, 2010

Apollo Group (NASDAQ: APOL):

Earnings Estimates (High/Mean/Low): $1.57/$1.55/$1.54

Investors will be looking for insight into ongoing regulatory hearings when APOL reports Q3 earnings Wednesday afternoon. The for-profit education industry has come under fire recently from several angles, including Wall St., as more than a few well-known investors, including Jim Chanos, ripped the industry at the ballyhooed Ira W. Sohn conference last month. The fact that companies like APOL receive upwards of 90% of their profits from Title IV student loans yet foster exceedingly high dropout rates and all the while invest in marketing/sales rather than education doesn’t exactly bode well for the industry. However, they do have the one thing that can help save any industry, no matter how unethical its pursuits, a robust DC lobbying effort. With strong forces on both sides of the fence, it’s hard to tell how this will shake out. But come Aug/Sept, we should know for sure whether Congress is going to come down on the industry.

Until then, we’ll have to settle for Wednesday’s earnings report. Barring a significant beat or miss on EPS, any post-report movement in shares is likely to be based on management’s commentary on the regulatory situation. As you can see from the chart below, shares have been hammered over the past two months, falling nearly 35% to $43.75 from an April 22nd high of $66.69. Considering the steepness of the drop, some on the Street may be looking for a bounce, but this may also be a classic value trap, as the passage of any reform bill would move shares significantly lower still. Nonetheless, if you’re looking to play a binary event, APOL, as well as competitors Corinthian Colleges (NASDAQ: COCO), Devry (NYSE: DV), etc., will all move significantly one way or the other once this situation has come full circle.

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