Apollo Group (APOL) has remained one of the few high-flying stocks in the market these days.Â There are a few obvious reasons including:
The firm has continued to execute very well.Â In their most recent quarterly report in January they posted solid results.Â Revenue grew 24% and operating margins rose to an a very rich 31.6%.Â
There is a belief that in a down economy characterized by job losses that online education companies like Apollo are in a very strong position and will be able to thrive while other parts of the economy swoon.Â More people in transition means more opportunity for incremental education to help them get into a new job.
Most analysts and investors love the management team at Apollo and feel that they are one of the best in the business for sure and perhaps near the top for public companies in general.
About a month ago the notorious short seller Citron Research began to pick on Apollo Group with some comments suggesting that their business practices were questionable and might not be sustained.
We’d say that the concerns raised by Citron were largely dismissed by analysts and investors.Â Although the shares have retreated a little bit, forward estimates and valuation all suppose that the company will be one of the few (the only?) to be able to grow right through the current economic environment.
Perhaps more concerning is a rasher of new documents and information released by Citron yesterday that point to more than a few eye brow raising practices at the company.Â Since Apollo is dependent on government education loans their practices are likely to fall under greater scrutiny than other companies.
One can’t help but think in reading through these documents that the "enrollment counselors" at Apollo are a lot like the "mortgage officers" of the current banking crisis.Â Paying people to "get people into the program" when that program is funded with government money is one of those things that gets a company or even a whole industry into trouble.Â
The showdown seems to be on the way as analysts have recently raised forward estimates for APOL and have price targets in the vicinity of $95/share.Â In fact most models we have seen are calling for an acceleration of top-line growth in 2009 and 2010.
According to S&P/CapitalIQ there are only 11M shares sold short out of about 159M.Â The stock has come in a bit with the market and trades at a TEV/REV of 3.2x and about 23x earnings.Â Insiders have been consistent sellers but continue to own large positions in the company.
We haven’t done any of the research here but we have reviewed what is out there on both sides of the argument.Â Given the valuation and forward estimates for this company we think there is some cause for alarm.
[Disclosure: Research 2.0 has a small short position in the shares of APOL at the time of this writing.]