William Blair equity research analyst Timo Connor rate Apollo Education Group Inc (NASDAQ:APOL) as Market Perform.

Apollo Education Group

Expectations from Apollo

Apollo Education Group Inc (NASDAQ:APOL) reports fiscal first-quarter results after markets close on Tuesday, January 7. Analysts expect slight improvement in starts trends driven by discounting, modest bottom-line upside based on continued strong expense controls, and positive commentary on the company’s recent acquisition of Open Colleges Australia. Analysts reportedly would need to see evidence of a sustained turn in demand before they get more positive on the stock for the long term, but believe the risk/reward in the near term is generally attractive. While trends at Apollo have largely deviated from the rest of the sector in recent years, results are likely to be viewed as most relevant for Strayer Education Inc (NASDAQ:STRA) ($34.14; Underperform) and Capella Education Company (NASDAQ:CPLA) ($64.58; Outperform).

Decline in 2013’s fourth quarter

Starts declined 22% in fiscal 2013’s fourth quarter (which ended in August), a slight improvement over the 25% decline in fiscal 2013’s third quarter. Management indicated on the fourth-quarter call on October 22 (more than halfway through fiscal 2014’s first quarter) that it expects “similar or slightly better year-over-year rates of decline.” Google Trends data (see exhibit on page 3) supports similar starts trends. Analysts project an 18% decline versus consensus estimates for a 20% decline.

Reduction in undergraduate degree costs

Analysts expect continued positive commentary on the health of the business, particularly new enrollment and retention trends based on the likely success of the University of Phoenix Scholarship Reward Program, which reduces undergraduate degree costs by up to $10,000 (from about $58,000 for a bachelor’s degree to $48,000). Prices are now much more competitive, and similar discounting programs at Capella Education Company (NASDAQ:CPLA), ITT (ESI $35.08; Outperform), and Strayer Education Inc (NASDAQ:STRA) have stimulated volume increases. They also note that the Scholarship Reward Program was extended to new students from first quarter 2014 into second quarter 2014, a good sign that it is achieving the desired results.

Enrollment guidance

In addition, management has guided to end of fiscal 2014 total enrollment of 230,000, which implies significant improvement in starts as fiscal 2014 progresses. Analysts expect total enrollment guidance to be reiterated, along with revenue guidance of $2.95 billion to $3.05 billion and EBIT of $375 million to $450 million, with continued positive commentary on margin trends through fixed cost cuts of $600 million or more.