11 February 2007

APOL - University of Phoenix Gets Torched by the Gray Lady

Sam Dillon, reporting with a Phoenix dateline, eviscerated the for-profit University of Phoenix, owned and operated by the publicly-traded Apollo Group. The dateline caught my attention as Dillon's piece could be reported from any of the 39 states where there's a campus, I guess. I always thought the name attaching the mostly online institution was a bit of a ruse to root itself to a specific geographic locale. But I digress.

It's a withering piece--perfect fodder for the Pig to build a case against Apollo.

First off, the image of today's Times below shows the prominence this story's receiving. It appears on the far left column, just above-the-fold.

Here's the crux of the piece, broken down into major points by yours truly:

The complaints have built through months of turmoil. 1.The president resigned, as did the chief executive and other top officers at the Apollo Group, the university's parent corporation. 2.A federal court reinstated a lawsuit accusing the university of fraudulently obtaining hundreds of millions of dollars in financial aid. The university denies wrongdoing. 3.Apollo stock fell so far that in November, CNBC featured it on a "Biggest Losers" segment. The stock has since gained back some ground. [Quite a bit, actually.] 4.In November, the Intel Corporation excluded the university from its tuition reimbursement program, saying it lacked top-notch accreditation.

These are significant negatives. Granted, the turnover at the top should subside, and shares in APOL have rocketed up 40% from their November lows. The lawsuit and Intel spurning the University of Phoenix remain, bolstering the bearish case.

Will press like this encourage other states and the federal government to scrutinize the UoP? Will companies other than Intel question the quality of education UoP provides for its employees, and follow Intel's suit?

Dillon continues:

"Wall Street has put them under inordinate pressure to keep up the profits, and my take on it is that they succumbed to that," said David W. Breneman, dean of the Curry School of Education at the University of Virginia. "They seem to have really stumbled."

In the interview, Dr. Pepicello shrugged off the bad news. Many top corporations still pay for employees to attend the university, he said, and the exodus of top officials has resulted from a healthy search for new directions. "We are reinventing ourselves," Dr. Pepicello said.

What can Dr. Pepicello say? He's on the defensive here.

Scrutiny of for-profit universities is on the rise. Here in NYC, for-profit schools are advertised all over the subway. Of these, the Interboro Institute has been investigated for enrolling unqualified students and reaping federal student aid it didn't deserve, and the Taylor Business Institute was ordered closed by the New York State Board of Education at the end of 2006 for failing to meet minimal education standards. And there's the story of Decker College, a for-profit vocational school in Kentucky that fell into bankruptcy, ruining the thin chance William Weld had of taking on now-Governor Spitzer.

Prestige and accreditation back up the degree a student receives. What is the value of a degree that lacks either of those qualities?

"Their business degree is an M.B.A. Lite," said Henry M. Levin, a professor of higher education at Teachers College at Columbia University. "I've looked at their course materials. It's a very low level of instruction."

In November, the university's reliance on part-time faculty caused a problem with Intel, hundreds of whose employees it has educated. Alan Fisher, an Intel manager, said the company had decided to pay for employees to attend only highly accredited programs. Although Phoenix is regionally accredited, it lacks approval from the most prestigious accrediting agency for business schools, the Association to Advance Collegiate Schools of Business.

John J. Fernandes, the association's president, said the university had never applied. "They're smart enough to understand their chances of approval would be low," Mr. Fernandes said. "They have a lot of come-and-go faculty. We like institutions where the faculty is stable and can ensure that students are being educated by somebody who knows what they're doing."

Wouldn't a school like UMUC, a University of Maryland school, be a better choice for older students? UMUC offers an array of online degree programs accredited by the Middle States Association of Colleges and Schools.

The Pig understands the allure of convenience distance learning. I took classes at Hunter College while working with the help of a flexible schedule that permitted me to hop on the 6 train, sit in a classroom for an hour or two, and then return to the office. But then again, I was lucky to have that option; not many people have flexible schedules, a college 25 blocks from my office, and CUNY's uber-cheap tuition--about half that of UoP.

The big kicker in the case against APOL comes in the last paragraph:

Those questions are likely to dog the university as it defends itself in the lawsuit, which a district court had dismissed but an appellate court reinstated in September. The university could be forced to repay hundreds of millions of dollars if it loses. It asked the Supreme Court last month to review the appellate ruling, arguing that an adverse outcome in the lawsuit could expose it to "potentially bankrupting liability."

Potentially bankrupting liability makes me want to look at put LEAPS, on top of shorter-term put options.

Check out APOL's weekly chart, care of stockcharts.com:

Notice how APOL rarely trades above its 40-week moving average? And when it does, it drops soon thereafter?

Morningstar rates APOL five-stars, giving the company's shares a fair value of $65 per. On the surface, APOL fits Morningstar's criteria in that it's the leader in online education, has a wide economic moat, and produces lots of free cash flow. Enrollment is up 8.6% based on Apollo's focus on growing its associate's degree programs.

Problem is, Morningstar's generally positive view of APOL contradicts the Times piece. From the current APOL Morningstar report:

Apollo's regional accreditation, recognizable brands, and solid reputation contribute to its wide moat...

Apollo's ability to attract working adults and its students' employers' willingness to support tuition reimbursement for an Apollo education are indication of its solid reputation.

The Times' harsh spotlight on Apollo's University of Phoenix shows the flaws in Apollo's reputation, and Morningstar's arguments.

APOL, along with SNE, are christening the new WershovenistPig Negative Stock Watch List, joining the numerous other sections over to the left.


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