American Public Beats Overall
American Public Education, Inc. (APEI) beat the Zacks Consensus Estimates for both revenue and earnings. However, new student starts were slightly weak and operating margins declined in the quarter.
American Public’sfourth quarter 2012 earnings of 74 cents per share beat the Zacks Consensus Estimate of 67 cents by 10.4% and the prior-year quarter’s earnings of 71 cents by 4.2%. Earnings were also above the guidance range of 64 cents - 67 cents. Cost savings owing to the company’s strategic initiatives led to the earnings beat.
Investments in information technology infrastructure to support a larger and more diverse student population, automation of Title IV processes, and the ePress initiative are manifesting favorable results. These initiatives helped lower costs in the reported quarter. Further, American Public’s fraud prevention initiatives have been effective in reducing enrollment of students who abuse funds, thereby reducing bad debt expenses.
Total revenue grew 14% year on year to $86.0 million. The rate of increase was higher than management’s expectation of growth in the range of 9% – 13%. Revenues also slivered past the Zacks Consensus Estimate of $85.0 million. The top-line growth was driven by brisk student enrollments in the quarter, particularly from civilian, military, and veteran students.
Operating income for the quarter increased 8% to $21.4 million. Operating margin, however, declined around 130 basis points to 25% in the quarter.
Despite a challenging industry environment, American Public has been consistently delivering positive growth in revenues, earnings and enrollments. In fact this higher education provider has beaten the Zacks Consensus Estimates for earnings for 7 straight quarters. This is impressive given that most of its peers have been witnessing consistent enrollment declines.
Enrollment Growth
Total enrollment increased 10% year over year to approximately 105,300; within the company’s guidance of recording growth in the range of 8% – 12%. New student enrollments declined to approximately 22,600, higher than management’s expectations of a decline between 3% and 7%.
Management believes that the prior-year quarter may have included enrollments of students who abused student aid. The company’s fraud prevention initiatives are reducing enrollment of such students who abuse funds, which explains the decline in new student starts for the quarter.
Costs in Detail
Selling and promotional expense as a percentage of revenue increased to 19.1% of revenue, much higher than 16.4% in the prior-year period, due to American Public’s increased marketing efforts. General and administrative expenses were 17.9% of revenues in the quarter, down from 19.5% in the prior-year period due to lower bad debts. Bad debt expenses declined 80 basis points (bps) year over year and 100 bps sequentially to 3.5% in the quarter, Instructional costs and services were 34.5% of revenues in the fourth quarter of 2012, slightly lower than 34.6% of revenue during the fourth quarter of 2011. Cost savings from the ePress initiative and increased efficiency in student support services lowered this expense.
Annual Results
Adjusted earnings were $2.35 per share, which beat the Zacks Consensus Estimate of $2.28 by 3.1%. Adjusted earnings (excluding an income tax benefit) increased 10% from the prior year and also beat management’s guidance range of $2.25–$2.28.
In fiscal 2012, the company witnessed a 20% increase in revenues to $313.5 million, slightly beating the Zacks Consensus Estimate of $312.0 million.
First-Quarter 2013 Outlook
As always, American Public introduced its financial guidance for the next quarter, i.e. the first quarter of 2013. The company is expecting revenue growth in the range of approximately 9% to 13% for the first quarter of 2013. Management now expects first quarter of 2013 enrollments to increase between 7% and 10% over the prior-year period. New student enrolments are expected to decline between 5% and 7%. Management further projects first quarter of 2013 earnings between 55 cents and 58 cents a share, representing year-over-year growth of 10%–16%.
Overall, management expects its ePress initiative, information and technology upgrades, Title IV processing automation, recently announced technology fee, and lower bad-debt expense to drive margin expansion in 2013. Moreover, the company intends to spend less on traditional media advertising, which are relatively expensive and also easily attract fund abusers.
American Public will also include such student programs in its portfolio, which cater to high-demand education fields. For example, at the fourth quarter conference call, the company announced that it has received regulatory approval to offer a new Bachelor of Science degree in electrical engineering. Management believes this approval will boost its brand awareness and in turn its revenues and cash flows as engineering degrees enjoy high demand.
The stock carries a Zacks Rank #1 in the near term (Strong Buy) following consistently impressive results over several quarters. We believe that the company’s affordable tuition costs and shifting of student focus to the civilian market are boosting enrollment growth. Moreover, its corporate and community college partnerships provide the necessary diversification from volatile enrollment trends of active duty military students. American Public has established relationships with companies like Wal-Mart Stores, Inc. (WMT), Dollar General Corporation (DG), ManTech International Corporation (MANT) and others. In addition, the company’s fraud prevention initiatives to improve student quality augur well for better student outcome and retention.
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