Apollo Group (APOL)

The accrual ratio, which measures the difference between cash earnings and accounting earnings, ideally should hover around zero. Apollo’s is all over the map, and the trend appears to be getting worse.

Sept 2009 is the qui tam lawsuit (US v. Apollo) which could cost Apollo a billion. Obama AG will have no remorse for Apollo, who previously had Boehner and Bush to back 'em up. Plus, Apollo's second huge stock buy-back is running out of gas.

On the conference call, management noted that “during the first quarter, we didn’t repurchase any of our Class A stock. As I just discussed, with the creation of Apollo Global, our potentially deep pipeline has grown significantly and we are busy evaluating the best use of our capital to create long-term value for our shareholders.” Could that be code for, “the stock is too expensive right now?”

On the conference call, management noted that “during the first quarter, we didn’t repurchase any of our Class A stock. As I just discussed, with the creation of Apollo Global, our potentially deep pipeline has grown significantly and we are busy evaluating the best use of our capital to create long-term value for our shareholders.” Could that be code for, “the stock is too expensive right now?”

Bad debt expense for the first quarter of 2008 as a percentage of revenue was 4.2% compared to 3.5% a year ago. Management also identified “certain items that should have been reported or should have been classified as discounts or refunds, that is, as a reduction of revenue, as opposed to a charge to bad debt expense in prior quarters.” This would have made the prior year number 2.9%, so the deterioration is from 2.9% to 4.2%.

Apollo’s associates degree programs are growing at a far faster rate than their bachelor’s degree program, which contributes to the bad debt issues and may contradict Wien’s thesis that higher growth will be coming from professionals looking to enhance their skills.

At 23x current year earnings and 13.3x book value (compared to an industry average of 3.5) Apollo hardly looks cheap by traditional valuation measures. Apollo’s free cash flow over the last 12 months was $540 million, which amounts to a 4.9% free cash flow yield. Although the paltry Treasury yields currently available result in a favorable comparison, I think there are other names with similar cash flow yield and growth profile but with higher earnings quality.

As to those rising earnings estimates, it’s hard to put too much faith in them when I see their quality. The accrual ratio, which measures the difference between cash earnings and accounting earnings, ideally should hover around zero. Apollo’s is all over the map, and the trend appears to be getting worse.

At 23x current year earnings and 13.3x book value (compared to an industry average of 3.5) Apollo hardly looks cheap by traditional valuation measures. Apollo’s free cash flow over the last 12 months was $540 million, which amounts to a 4.9% free cash flow yield. Although the paltry Treasury yields currently available result in a favorable comparison, I think there are other names with similar cash flow yield and growth profile but with higher earnings quality.