Apollo Group Crushed For No Good Reason

The question of bad debt expense for all these guys is now introduced.

– Ariel Sokol, Analyst, Wedbush Morgan

Apollo Group (APOL), owner of The University of Phoenix, is getting clobbered today after reporting fiscal year 2nd quarter earnings after the close yesterday.  The quarter was phenomenal with enrollments up 20% year over year and revenues 26%.  Their business continues to steamroll as rising unemployment and economic dislocation are causing many to go back to school.

But apparently analysts focused in on the rise in bad debt expense which rose to $36 million in the quarter from $26 million a year ago.  But this is a miniscule 4% of Apollo’s $876 million in revenue for the quarter.  Further, they only have $167 million in Student accounts receivable for owed tuition on the books so this is pretty much a non-issue in my opinion.

Shares are off $13 (16%) on big volume.

I think this creates a good entry for Apollo shares.  Their business should continue to be strong as people go back to school to obtain credentials for new lines of work. 

Valuation is also now starting to become attractive.  They have $909 million ($5.60 a share) in cash and marketable securities on their balance sheet.  Back that out and you have a 15-16 forward multiple on analysts earnings estimates for their fiscal year ending in August.  This for the leading private education company with a great operation and a whistle clean balance sheet.

Technically, today’s selloff has the marks of a capitulation selloff – or at least the beginnings of one.  The stock should also find some support at its 200 DMA around $68.

I initiated a starter position in Apollo (APOL) shares today.

Disclosure: Top Gun is long share of Apollo Group (APOL).