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Apollo Group Inc. – Profit from a ‘For Profit’
Posted by: Dr. Paul Price (IP Logged)
Date: April 24, 2009 01:53PM

Apollo Group [NDQ:APOL] April 24, 2009 $61.80 (1:25 PM EST)
52-week range: $42.80 (May, 20, 2008) - $90 (Jan. 22, 2009)

There are a few companies using the Apollo name in various forms. This write-up is about the ‘For Profit’ educational firm whose flagship is the University of Phoenix online university – not to be confused with the physical Arizona State University located in Phoenix.

APOL has about 105 campuses and 160 learning centers spread across 39 states plus Puerto Rico, Canada, the Netherlands and Mexico. Their internet- based degree programs operate worldwide serving over 360,000 students.

The company has posted consistently great earnings over the past decade.
EPS grew in eight of the past ten years with the only exception being relatively flat earnings in the fiscal years 2005 - 2007. (Fiscal years end August 31). Growth resumed in FY 2008 and into the first half of FY 2009.

Here are the per share numbers as reported by Value Line:

FY ….. Sales ….... C/F …... EPS ….. B/V ….. Avg. P/E …..Price Range
2002 … 5.95 ….. 1.16 ….. 0.87 …. 4.12 …… 37.5x …... 28.10 – 46.20
2003 … 7.71 ….. 1.65 ….. 1.30 …. 5.91 …… 38.7x ….…40.70 – 73.10
2004 … 9.71 ….. 2.04 ….. 1.88 …. 5.17 …… 41.4x ….…62.60 – 98.00
2005 …12.00 …. 2.68 ….. 2.39 …. 3.77 …….31.7x .……57.40 – 84.20
2006 …14.36 …. 2.79 ….. 2.35 …. 3.50 …….24.3x .……33.30 – 63.30
2007 …16.42 …. 2.89 ….. 2.35 …. 3.82 …….20.0x .……39.00 – 80.80
2008 …19.82 …. 3.51 ….. 2.87 …. 5.26 …….21.4x .……37.90 – 81.70

Zacks is now looking for FY 2009 and FY 2010 earnings of $3.96 and $4.81 respectively. That makes the current multiple on APOL just 15.6x this year’s and < 12.9x next year’s expectations. Compare those with the historical average P/Es in the chart above to see how discounted these shares are right now.

APOL shares hit $90 as recently as January 22nd this year before falling back when the market tanked into early March. Fears of government intrusion into their student loan programs and worries over bad debts owed by former students hurt by the poor economy seem to be weighing down the shares right now.

These types of fears have caused short-term havoc with the shares price in the past but the core earnings just keep chugging along on their upward path.
The recession appears to have sent more people back to school in search of the better job skills and credentials they may need to get back into secure jobs for the future. Enrollment figures have been climbing.

Apollo is virtually debt free with over $1.3 billion in cash against total debt of just $24.3 million as of February 28, 2009. They have no pension liabilities or preferred stock.

Even a relatively pessimistic view of the year-ahead multiple should leave these shares at around $65 - $75 this year. APOL has actually traded at $80 and higher in four of the past five calendar years with the exception still seeing a high of $63.30.

Here’s my combination play with Apollo from today through next January’s option expiration date:

……………………………….............……… Cash Outlay ……...…. Cash Inflow
Buy 1000 APOL @$61.80 ………....….. $61,800
Sell 10 Jan. $60 calls @$12.30 ……………………..….........…… $12,300
Sell 10 Jan. $60 puts @$10.30 …………………….......…..……. $10,300
Net Cash Out-of-Pocket ………....…….. $39,200

On expiration date if APOL shares are still above $60:

Your calls will be exercised.
You will sell your shares for $60,000.
Your $60 puts will expire worthless.
You will have no further option obligations.

You will have no shares and $60,000 cash for your original
outlay of $39,200. That’s a best-case scenario profit of $20,800.

$20,800/$39,200 = + 53%

This would occur if the shares go up, stay unchanged or even if they drop by as much as $1.80 or (-2.9%).

What’s the risk?

If APOL shares are below $60 on expiration date:

Your $60 calls will expire worthless.
Your $60 puts will be exercised.
You will be forced to buy another 1000 shares and to pay out
an additional $60,000 cash.
You will end up with 2000 shares of APOL.
You will have no further option obligations.


What’s the break-even on the whole trade?

On the original 1000 shares it’s the $61.80 purchase price less the
$12.30 /share call premium = $49.50 /share.

On the ‘put’ shares it’s the $60 strike price less the
$10.30 /share put premium = $49.70 /share.

Your break-even is the average of $49.50 + $49.70 = $49.60 /share.

You will not lose money on this trade unless the shares drop by $12.20 from the original cost or (-19.7%).

At the $49.60 break-even price Apollo Group shares would be trading at just about 12.4x calendar 2009 earnings estimates.


For Ken Heebner fans:
GuruFocus noted that Heebner took a new position in APOL during Q4 2008 with an average price of $68.20 /share.

Disclosure: Author is long APOL shares and short APOL options.


Stocks Discussed: APOL,
Rate this post:

Rating: 2.7/5 (10 votes)



Re: Apollo Group Inc. – Profit from a ‘For Profit’
Posted by: Dr. Paul Price (IP Logged)
Date: June 29, 2009 03:44PM

4:07 PM Apollo Group (APOL):

FQ3 EPS of $1.26 beats by $0.14.
Revenue of $1B (+26%) in-line.
Shares +3% AH.


APOL shares bidding $71 in pre-market trading June 30.


Stocks Discussed: APOL,
Rate this post:

Rating: 2.5/5 (11 votes)





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