Apollo Group (APOL) is expected to overcome weak enrollment trends and diminished earnings due to investments in technology and marketing, generating significant savings and alleviating near-term fines the University of Phoenix accreditation may incur from the Higher Learning Commission, says Daniel G. Lysik, Founder & Managing Director at Pratt Capital, LLC.
“We think Apollo’s cost-reduction program, eliminating redundant physical facilities and excess infrastructure costs, will generate significant savings starting in 2013 and continue through 2014. The company still generates a very attractive return on equity of more than 20%. With capital expenditures, only 3% of revenues, Apollo’s annual free cash generation is significant,” Lysik said.
Lysik says APOL has developed a way to make the online education space even more portable by combining multiple applications to provide services through mobile devices, and the company remains a well-known technology leader in its industry, with roughly 1,000 technology employees, a third of them in the Bay Area.
“The company has a pristine balance sheet with $9 per share of net cash and long-term investments. We believe if you look out a couple of years, as expenses come down, Apollo’s earnings should recover from $2-$2.50 range to normalized level closer to $4 per share. Apollo’s current market price, ex-cash, is currently only two times normalized earnings and has a normalized free cash flow yield greater than 40%,” Lysik said.
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