Apollo Education: The Federal Government Review Is Not A Major Cause For Concern, Says William Blair

In a research report released yesterday, William Blair analyst Timo Connor reaffirmed a Market Perform rating on Apollo Education Group (APOL). The report follows yesterday’s news that the Department of Education will conduct a Title IV program review. However, the analyst wrote that the program review is not a major cause for concern. No price target was assigned.

Connor noted, “We continue to believe that while headline noise exists from regulatory investigations of the private sector colleges, the range of potential negative regulatory outcomes has narrowed and will continue to narrow in future years, with Gainful Employment (final rules likely out by this November) the major outstanding issue, in our view (see our recent note for details on Gainful Employment). We also believe that after five years of positive changes to the industry (moves away from low-ROI toward high-ROI programs, exiting of low-quality lead generation channels, the introduction of orientation programs to filter out unprepared students, and price freezes and cuts), outcomes and default rates will likely significantly improve in future years for the sector, which should limit the scope and frequency of regulatory focus on the sector”.

Connor continued, “We continue to believe Apollo’s management is building a leaner and stronger education model, and while we would like more evidence of a sustainable turn in demand driven by the more-differentiated corporate and international channels to get more positive on the stock for the long term, we believe the introduction of long-term financial targets (likely in conjunction with the fiscal fourth quarter 2014 earnings release) and continued improvement in enrollment trends should stimulate enough investor interest to keep the stock working in the near term. With a favorable resolution on Gainful Employment, we would likely get more positive on the stock at current levels”.

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