American Public at Neutral - Analyst Blog

American Public Education (APEI) has carved a unique niche for itself in the online post secondary education industry by focusing on recruits serving the U.S. military as well as federal, national, and local law enforcement personnel. Moreover, the company's part-time programs are well suited to irregular and extended work schedules of these personnel who travel and relocate frequently and have limited financial resources. This provides a significant upside potential for the company.

American Public has witnessed an impressive revenue growth over the last three fiscal years. During 2007–2009, revenue surged from $69.1 million to $149 million recording a compound annual growth rate of 47% driven by high student satisfaction and referral rates, regional accreditation, and access to Title IV programs. Furthermore, management expects revenue to rise between 27% and 30% in fourth-quarter 2010.

The company's sustained effort to expand educational programs helps it to boost enrollments. However, American Public pointed that the enrollment of military students continues to be adversely affected by increased military operations in the U.S., and the deployment of military personnel in remote areas with limited accessibility to the Internet. The company also hinted that in order to offset the slowing pace of military enrollments, it is now focusing more on civilian students.

American Public now expects fourth-quarter 2010 net course registrations to jump between 26% and 29%, and net course registrations from new students to rise between 18% and 20%.

We observe that American Public's prediction of growth in student enrollments for the fourth quarter comes despite the regulation proposed by the Department of Education that may weigh upon students' enrollments and the company's profits.

The Department of Education proposed that an educational program could only qualify for Title IV funds, if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios. The company derives a major portion of its revenues from federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.

The for-profit education institute, Capella Education Company (CPLA), now expects enrollment to rise in the range of 16% to 17% in fourth-quarter 2010, reflecting slower growth compared with the previous quarters. The sector bellwether Apollo Group Inc. (APOL) also cautioned that enrollment in first-quarter 2011 would drop by more than 40%, and withdrew its outlook for the fiscal year, citing an uncertain regulatory environment.

Given the pros and cons, we prefer to be Neutral on the stock. Moreover, American Public holds a Zacks #3 Rank, which translates into a short-term ‘Hold' rating, and correlates with our long-term recommendation.

 
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