Is The Apollo Group Stock Undervalued?

 

 

Apollo Group (APOL: 44.44 +0.38 +0.86%) has been in and out of the magic formula screen for quite some time now. It appeared in 2008 when the stock hit multi year lows and traded in the low $40′s. As the market rebounded, Apollo's stock rebounded tremendously and more than doubled to almost $90. It currently sits in the low $40′s and appears on the top 30/50 million magic formula screen. It caught my attention about a month ago as it's the second largest company (by market cap) on the list, behind Forrest Laboratories (FRX: 28.39 +0.07 +0.25%). Usually,  but not always, when a large company appears on this screen, the stock is undervalued. But, like any stock, it is important to do the homework and analyze the opportunity and risks involved with the company.

Apollo Group's Line of Business (Google Finance)

Apollo Group, Inc. (Apollo Group) is a private education provider. The Company offers educational programs and services both online and on-campus at the undergraduate, graduate and doctoral levels through its wholly-owned subsidiaries, The University of Phoenix, Inc. (University of Phoenix), Western International University, Inc. (Western International University), Institute for Professional Development (IPD), The College for Financial Planning Institutes Corporation (CFFP), and Meritus University, Inc. (Meritus). The Company has a joint venture with The Carlyle Group (Carlyle), called Apollo Global, Inc. (Apollo Global), to pursue investments primarily in the international education services industry. During the fiscal year ended August 31, 2009 (fiscal 2009), Apollo Global completed the acquisitions of BPP Holdings plc (BPP) in the United Kingdom, Universidad de Artes, Ciencias y Comunicacion (UNIACC) in Chile, and Universidad Latinoamericana (ULA) in Mexico.

Apollo's Financial Position

By most accounts, Apollo seems to be financially solid. It currently has about 900 million in cash and equivalents compared to about 115 million of long term debt. Revenues continue to grow in the mid teens for each 3 year period in the past decade. Free cash flow and cash from operations are growing at a lower pace for each 3 year period in the past decade, around 11% and 9% respectively. While cash flow looks good, what you do with it is even more important. As such, looking at an efficiency ratio such as CROIC is very important. Apollo's CROIC seems to be great as it's usually above 30%.  But there are times when CROIC goes negative. This occurred in 2001, 2003, 2008 and the trailing twelve months (ttm), which are also the years in which Apollo's stock traded at or below the mid $40′s. (click on image below to see all 10 years).

Apollo Magic Formula Numbers

Apollo's magic formula numbers look great by both measures. My guess is that it currently ranks in the top 5.

Risks Associated with Apollo

Risks associated with Apollo come from its business model. Most of a for profit university's revenue comes from government financed student loans. Unfortunately, along with the increasing revenues, comes a pretty large number of defaults on those loans. This first came to my attention when doing a bit of research and the latest comments on a Gurufocus thread in which several members point out the problem of generating huge profits and at the same time providing a sub-par education. As such, any investigation by the federal government might lead to some serious damage. With this in mind, while the stock might look undervalued, I will simply pass and move on.