An Educational Bargain?

19 Oct

Was the slamming of Apollo Education (APOL) shares yesterday an overreaction? The sharp (22%) drop had to do with below-expectation earnings growth and the fact that numbers might have to be restated once the company has completed its review of options practices. The million-dollar question – what impact will restatements, if any, have on the financial statements?

The company operates the largest private university in the country (University of Phoenix) and offers educational programs and services at 100 campuses and 159 learning centers in 39 states, Puerto Rico, Washington DC, Alberta, British Columbia, Netherlands, and Mexico. Management controls the company, as the founder and his son own all of the voting shares. This can be good and bad, but overall you can bet they’re watching out for company interests and not taking undue risks with the capital that represents a significant portion of their net worth. The company carries no debt and its returns on capital have averaged in the high 20s over the past 10 years (over 40s in the last couple). Of course, restatements may affect the return on capital numbers, but not the fact that they carry no debt on the balance sheet (though there are about $120M of operating leases off-balance sheet).

Upon cursory examination, this looks like a good value at 13 times forward earnings and a free cash flow yield of 8.3%. They’ve been using that discretionary cash to buy back shares the last several years, which has more than offset the dilution from option exercises. With the growth opportunities that lie ahead, this could be a screaming bargain. But how reliable are the numbers? I’ll post more thoughts later.

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