FPA Capital Comments on Apollo
As we mentioned in our last letter, our investment thesis in APOL is similar but not identical DeVry. That is, we believe the efficient delivery of quality education to people who did not attend a traditional four-year college is essential for those students and workers to enhance their knowledge and compete in today's domestic and global economy. People with college degrees experience lower unemployment rates and get paid more than those with just a high school diploma. According to U.S. Census Bureau, there are approximately198 million people in the U.S. over the age of 25. 31% of these people have high school as their highest educational attainment and another 17% have some college but no degree. Hence, over 95 million people might be interested in obtaining a college degree. Many for-profit schools offer online programs, night/weekend classes, and convenient locations. All of which help working adults who seek flexible schedules earn a degree.
APOL's earnings peaked a couple of years ago at a shade over $4 per share. We believe the company's EPS could decline substantially over the next year or two, despite the consensus expectations that APOL will earn roughly $3 this year and $2.50 next fiscal year. We further believe APOL's normalized earnings, once the cost cutting efforts are complete, could be higher than street estimates. Assuming the company achieves that level of earnings and that the markets apply a reasonable earnings valuation to the stock price, we believe that the stock has good growth potential. The company's recently released results for its fiscal third quarter provide evidence that management is rationalizing the company's cost structure to generate good free cash flow for shareholders, despite the current challenging enrollment issues. In addition, the balance sheet remains pristine with more than $7 in net cash per share.
From FPA Capital's second quarter 2013 commentary.