One couldn’t help but notice the sharp drop in Apollo (APOL – $61) a few days ago in response to a downgrade from Credit Suisse.Â Â What’s more intriguing to us is the extreme change of view over a short 3 week period.
On April 1st analyst Kelly Flynn felt that concerns post the Q2 report were “overblown” and that concerns and less margin expansion were “already reflected” in valuation.Â As for concerns coming on the regulatory front the were said to be “less credible than [they have been] for several years given management’s obvious constructive approach to educational quality and all regulatory issues.”Â In the note the analyst went on to increase estimates and reiterate their Outperform rating and $95 price target.
Since the report we have been seeing matters of real concern about Apollo and written about them right here. Because we are short the name we were pleased to see Credit Suisse come out just 20 days later on April 21st with a downgrade of the shares.Â But it’s still puzzling that now the analyst feels exactly the opposite regarding regulatory scrutiny and a slowing of the business going forward.
Our best guess is that the deeper you look the more problems you see.Â Again it’s not that the company is bad but that the risk from more regulatory scrutiny and estimates that look simply too high argue for there being much more risk than most are factoring in.
Thankfully for Apollo shareholders Deutche Bank joined the cheerleading section by coming out with a Buy rating on the shares the same day as the Credit Suisse downgrade.Â The analyst at DB must have felt odd watching the stock tank that day but able to use the well worn phrase “we loved it at $65 so we really love it down here at $60.”
Recently the current administration has been making clear noises about reform in the credit card industry.Â This is just more evidence to us that the government will want to know that the debt that is being piled on students by for-profit educational companies is actually in their best interests.Â Apollo has mounted a major advertising campaign to keep visibility and enrollments up but it will also ensure that they are in the sights of whomever might be interested in reforming questionable industry practices.
Lastly there’s something about feel that we can’t ignore with this company.Â From the management commentary to the website the company comes off as a enrollment and degree granting *machine* which can be seen as a good thing if you stand to profit from the volume. It’s not very consistent with an institution of higher learning or even a trade school.Â Everything shouts “enroll in a program” and it can be financed with student loans.Â Â We realize that Apollo Group is a real company and many students and alumni get good value from their involvement with the company.Â But it seems that a many, possibly a majority, do not and Apollo has business practices that don’t seem above reproach.
[Disclosure: As mentioned above Research 2.0 is unabashedly short some shares of Apollo Group based on what we see as a mis-pricing of risk in the market price of the stock.]