Thursday, November 12, 2009

Apollo Group (NASDAQ:APOL): APOL Management Meeting and Campus Visit Reassure Us - ALERT - J.P. Morgan

J.P. Morgan is out defending Apollo Group (NASDAQ:APOL) following management meeting and campus visit.

Firm notes they met Apollo Group’s co-CEO Greg Cappelli and visited the company’s campus in Jersey City. Overall, they came away reassured about APOL’s approach to accounting, student retention, and 90/10.

Management’s tone around compliance and accounting was comforting to JPM.
While co-CEO Cappelli did not give any updates to the timeframe or the scope of the SEC inquiry, he sounded credible and engaged in the business. Mr. Cappelli reiterated his confidence with APOL’s accounting policies, particularly related to revenue recognition, and operational controls in various parts of the firm. He reminded JPM that members of the current senior management team (including President/COO D’Amico) had first worked with APOL in a consulting capacity tasked with (along with forensic accountants) scrubbing its financial statements. Since then, management made numerous operational enhancements, including finance and HR functions. Furthermore, senior management and the company's auditors signed off on the FY2009 10K. To the best of JPM's knowledge, there does not seem to be a direct link between the ongoing Education Department actions (focused program review of APOL and neg-reg) and the SEC inquiry, which reduces the probability of the cash flow being affected.

90/10 looks manageable when including relief.
Firm notes they were reminded that APOL's 90/10 ratio of 86% for FY2009 (Aug) was reported before the preferred treatment of the $2,000 in unsubsidized Stafford loans (approved in 2008). Including the impact, APOL's 90/10 ratio will be somewhat lower.

Quality of student experience is a top focus.
JPM believes the topic of student experience is "top-of-mind" for management. Clearly, better student experience results in higher retention and enhanced student outcomes. APOL would be willing to sacrifice some start growth to obtain more committed students. Importantly, APOL has been collecting vast amounts of data related to student behavior, and now (after about two years) is trying to put analytics around it. In addition, APOL's new free orientation pilot program is designed to help new students to self-select out of college (without debt burden), if they see college as too demanding. They also appreciate the need for such tool, particularly at Axia which enrolls students with more risk factors. Finally, the firm thought that APOL’s student-to-teacher ratio (of mid-teens) was much lower than most of its peers and traditional institutions.

Campus visit highlighted the need for continuous enhancements of the student experience.
JPM attended an entry-level class in APOL’s Jersey City campus. The demographic of the students in the class (13 students in total) was representative of inner cities with a mix of working adult students and a couple of traditional-age students. The firm thought the quality of the material was appropriate, and the instructor did a fine job of engaging students in the learning process. They also think the new Student Resource Centers provide a reinvestment in the local campuses and community activities which will bear fruit.

Maintains Overweight on APOL.

Notablecalls: While the stock is down 20pts following the SEC investigation news and overall bad publicity over the past couple of weeks, I'm not making a bounce call here following the JPM note. I would not be surprised to see a bounce in APOL but the JPM call is just a tad too superficial to inject the much needed conviction to buy the education name down here.

I would put APOL on the bounce radar and if/when the market starts ripping again an opportunity may present itself.

So, just a heads up on the call.


Kevin said...

"While co-CEO Cappelli did not give any updates to the timeframe or the scope of the SEC inquiry, he sounded credible and engaged in the business. Mr. Cappelli reiterated his confidence..."

Sounds a little bit like whistling past the graveyard.

paul said...

News about class action settlement has seen a big bounce yesterday- what's your view? should that put a floor under this now?