Thursday, July 26, 2012

Apollo Group (APOL) - Vol Rises, Stock Hits New Low, Are For-profit Education Companies Permanently Not Worth as Much Anymore?

APOL is trading $26.96, down 3.8 with IV30™ up 14.5%. The LIVEVOL® Pro Summary is below.


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Apollo Group, Inc. (Apollo Group) is a private education provider. The Company offers educational programs and services both online and on-campus at the undergraduate, master’s and doctoral levels through its wholly owned subsidiaries, The University of Phoenix, Inc. (University of Phoenix); Institute for Professional Development (IPD); The College for Financial Planning Institutes Corporation (CFFP), and Meritus University, Inc. (Meritus).

This is a vol and stock note in a name that has just breached a new 52 wk low while vol is climbing. While I focus on APOL, the trend seems to be similar for a number of companies within the for profit education industry.  Ultimately, with the new Federal regulations, it's seems a fair question to ask, "are these companies just not worth as much as they used to be?"

Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side, we can see the ugliness of a couple gaps down as well as a general down trend more recently. Here are some snippets from the two gaps I highlighted:

For-profit educator Apollo Group (APOL) lowered enrollment and operating profit projections, citing an improving jobs market, competition from other educators and changes in its marketing and recruitment efforts.

The operator of the University of Phoenix said it expects flat to low-single-digit new degree enrollment growth for the quarter ending Feb. 29, below the previous expectations for 13%. Factoring out this current quarter's extra day, new degree enrollment is seen decreasing in the low- to midsingle digits, vs. previous expectations of a midsingle digit increase.

Its profit outlook for the August-ending fiscal year sank, too. Apollo now expects operating profit between $625 million and $725 million, excluding one-time items, vs. a previous forecast of between $655 million and $750 million. Analysts were predicting $746 million.

Source: Investor's Business Daily via Yahoo! Finance; Educator Apollo Sees New Degree Enrollment Declining, written by Kevin Harlin.

And then in late March:


NEW YORK (AP) -- Shares of Apollo Group Inc. slid 6 percent premarket trading Tuesday after the for-profit education company issued a dim forecast.

The Phoenix company posted a second-quarter profit of 51 cents per share late Monday, reversing a loss from a year earlier. Adjusted earnings per share of 58 cents beat the average analyst forecast by 20 cents. Revenue fell 7.5 percent as enrollments dropped 8 percent, but it still beat estimates.

But Apollo expects new enrollment to turn negative in the third quarter and Citi Investment Research predicted that second-half operating income will fall short of Street expectations.

Like many for-profit educators, Apollo has been dealing with the impact of new federal regulations on enrollment. Stricter government regulations enacted last summer prompted the companies to raise admissions standards, which has cut enrollments and profitability.

Source: AP via Yahoo! Finance; Ahead of the Bell: Apollo Group slips

So the stories are similar, business may be waning.  It's the context of the decline that's a bit scary -- this isn't necessarily just a bad time in the business cycle, but rather feels like a permanent paradigm shift in the way these companies can make money. Back to the stock decline, what's more interesting (to me) than the gaps down, is the new decline that started on 7-3-2012. The stock has gone from $36.62 down to $26.96, as of this writing, in about three weeks for a 26% drop. This drop feels scarier than the other two in that it's persistent and consecutive. The 52 wk range in stock price is [$26.84, $68.66], so the stock is right on its 52 wk low.

Looking to the vol, we can see the rise in the implied of late, essentially in lock step with the dipping stock. Since 7-3-2012, the IV30™ has risen from 32.45% to 54.48% as of this writing, for a 67.9% rise. In English, as the stock has dropped ~25% in the last three weeks, the vol has risen ~66%.

Let's turn to the Skew Tab to examine the month-to-month and line-by-line vols.

Note that the red and yellow curves are the weekly options. We do see a beautifully normal skew shape across all four expiries, as well as a monotonic rise in vol from the back to the front. In English, the option market reflects elevated vol in the near-term relative to the intermediate-term. I do also note that the next earnings release should be after all four of those expiries (that's just a projection).

Finally, let's turn to the Options Tab, for completeness.

Across the top we can see the vols are priced to 69.92%, 58.21%, 55.50% and 50.96%, respectively for Jul27(W), Aug03(W), Aug and Sep.

In perusing the news it does appear that other for profit educators are struggling (see the recent release from DeVry, which is also now at a 52 wk low). Looking back to the news story at the top, it does seem like this industry as a whole is going through (has gone through) a substantial shift in the business model as dictated by changes in federal regulations. This downward move may be in fact new equilibrium points for the entire industry... these companies just might not be worth a much as they once were.

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