(APEI) American Public Education Upgraded to Outperform

We recently upgraded our recommendation on American Public Education, Inc. (APEI) following solid top and bottom-line results in the second quarter that surpassed both management as well as the Zacks Consensus Estimates.

American Public’s second quarter 2012 earnings of 51 cents per share beat the Zacks Consensus Estimate of 45 cents by 13% and the prior-year quarter earnings by 4.1%. Earnings were also significantly above the guidance range of 41 cents – 47 cents driven by better-than-expected top-line and enrollment growth in the quarter.

Total revenue increased 23% year on year to $74.6 million and was slightly above management’s expectation of a growth in the range of 14% to 22%. Revenues also edged past the Zacks Consensus Estimate of $72.0 million. The top-line growth was driven by brisk student enrollments in the quarter, particularly from civilian, military, and veteran students.

Total and new enrollment growth was also above management expectations.  American Public has been consistently delivering positive growth in revenues, earnings and enrollments. This is impressive, considering that most peers have contrarily been witnessing consistent enrollment declines.

American Public is one of the leading online providers of higher education, focused primarily on serving the military and public service communities. American Public’s tuition costs are not only lower than tuition fees for most private schools but also 20% below the average in-state tuition cost for public universities. The affordability of the company’s courses and programs will benefit it in the long run due to increasing price sensitivity among students in this challenging economic environment.

Moreover, American Public is gradually shifting focus from military personnel to public service segments of the civilian market. In 2011 as well as in the first half of 2012, the company witnessed significant growth in enrollment by civilian students partly due to the attractiveness of the Title IV funds and also because of the affordability of the courses offered. Though shift in student mix to civilians would result in higher selling and promotional costs and bad debts, it bodes well for the company’s long-term growth as these students generally take more classes than military students and show higher retention rates.

We believe that the company’s affordable tuition costs and its shifting of student focus to the civilian market are boosting enrollment growth.

The company is also looking for international opportunities besides entering into corporate relationships and community college partnerships to give it the necessary diversification from volatile enrollment trends of active duty military students. American Public Education has established relationships with companies like Wal-Mart Stores Inc. (WMT), Dollar General Corporation (DG), ManTech International Corporation (MANT) and others as well as non-profit associations including National Environmental Health Association and Hispanic Information and Telecommunications Network.

The educational institution is under the scanner due to the rise in abuse of funds, mostly by civilian students who use the balance fund (fund is usually more than American Public Education’s tuition costs) to meet living expenses. American Public is taking steps to reduce student abuse of the Title IV Funds and thereby improve student outcomes. The company’s fraud prevention initiatives have been effective in reducing enrollment of students who abuse funds since the beginning of 2012. Though these steps might result in lower enrollments in the near term, it will result in quality academic outcomes in the longer term and build goodwill for the company.

The company is also developing its information technology infrastructure to support a larger more diverse student population. Further, it is making investments to automate Title IV processes and has launched an ePress initiative which will help reduce costs and thereby increase affordability. The company is also focusing on marketing and promotional activities to increase awareness of its brand.

Read the full analyst report on “WMT”
Read the full analyst report on “APEI”
Read the full analyst report on “DG”
Read the full analyst report on “MANT”
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