American Public is Outperform (APEI) (CPLA)

Zacks

American Public Education (APEI”>APEI) has carved a unique niche for itself in the online post secondary education industry by focusing on recruits serving the U.S. military as well as and public service personnel. Moreover, the company’s part-time programs are well suited to irregular and extended work schedules of these personnel who travel and relocate frequently and have limited financial resources. This provides a significant upside potential for the company.

However, the company is now primarily focusing on increasing net registrations from civilian students, to safeguard itself from the adverse impact of a fall in military registrations due to increased military operations.

American Public Education has witnessed an impressive revenue growth over the last four fiscal years. During 2007-2010, revenue surged from $69.1 million to $198.2 million recording a compound annual growth rate of 42% driven by high student satisfaction and referral rates, regional accreditation, and access to Title IV programs. Furthermore, management expects revenue to rise approximately 29% in third-quarter 2011.

The company’s sustained effort to expand educational programs helps it to boost enrollment. Net course registrations rose 28% and net course registrations from new students climbed 39% in second-quarter 2011. Management forecasted net course registrations to rise approximately 28%, and net course registrations from new students to jump approximately 35% in third-quarter 2011.

We observe that American Public’s projection of growth in student enrollment for the third quarter comes despite the regulation proposed by the Department of Education that may weigh upon students’ enrollment and the company’s profits.

The Department of Education proposed that an educational program could only qualify for Title IV funds, if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios. The company derives a major portion of its revenue from federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.

Another for-profit education institute, Capella Education Company (CPLA) cautioned that new enrollment in third-quarter 2011 is expected to tumble by approximately 30%. To counter sluggishness in students’ enrollment education companies are re-working their cost base.

Further, American Public Education has a healthy debt-free balance sheet, with cash and cash equivalents of $94.5 million at the end of the second quarter. This offers financial flexibility to the company to drive future growth.

Currently, we maintain our long-term Outperform rating on the stock. Moreover, American Public holds a Zacks #2 Rank that translates into a short-term 'Buy' recommendation.

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