Apollo Group, Inc. (APOL)

1. Apollo Group, Inc. (APOL) Analyst: Will Hippler

2. About the Company • Apollo Group is an Educational Services Company. It owns several popular subsidiaries, through which it offers college-level educational services. • Its main focus is working adults. • Apollo Group’s subsidiaries include: • The University of Phoenix and its online component, • Western International University, • The Institute for Professional Development • The College for Financial Planning. • Combined, Apollo Group operates 90 campuses and 154 learning centers in 39 States, Puerto Rico and Canada. The company boasts an enrollment of over 300,000 students. (Annual Report, MSN) • Apollo Group divides its operations into two operating segments within the educational services market: • The University of Phoenix segment • The Other Schools segment • Some of Apollo’s main strategies over the past several years have been to maximize asset allocation, while minimizing tuition and increasing educational quality.

3. About the Company • Company Strengths • Revenues are expected to grow an average of 9.5% per year from 2007 to 2010. (Value Line) • Net Income and Earnings per Share are both expected to grow at around 11% per year from 2007-2010. (Value Line) • Brands like the University of Phoenix give Apollo Group assets with good name brand recognition within its market. • Over $400 Million in yearly net income, $1.3 Billion in total assets and no debt should make Apollo Group a financially durable company • Focus on one industry allows company to develop expertise in the industry. • Apollo Group is able to significantly benefit from the increased trend in both college enrollment and enrollment among adults and professionals. • College enrollment among professionals, especially online, will likely to continue to grow. • Company Risks • The company always faces competitive risk from other institutions. • Other institutions are developing Associate Degree, working professional, and online educational opportunities of their own, which threaten Apollo Group’s enrollment. • Apollo Group has seen a recent slowdown in enrollment to their physical campuses. • The company has a significant Federal case outstanding involving its stock option plan. • The company faces some risk as it expands its services to include new locations both within the United States, as well as internationally, such as Mexico, India, and China. • Because the company is focused on one industry, it assumes the risks of that industry. • A slowdown in the educational services area would dramatically affect Apollo’s earnings. • The company’s long experience, name recognition and strong financials mitigate this somewhat.

4. Industry Analysis • Growth Rates • Apollo Group has shown surprisingly slow Revenue and EPS growth recently, which are 5.6% and 1.9% respectively. • Apollo’s 5 year revenue growth is strong, however. At about 30%, it is the strongest in the industry. • Financial Condition • Neither Apollo Group, nor its main competitors have any significant debt. • Profit Margins • Gross Margin for Apollo is among the highest in the industry at 57%. • Apollo’s net margin is also high at 18.4%. • At 17.3%, Apollo’s 5 year average profit margin is high. • Investment Returns • Apollo has a ROE, ROA and ROI of 72.1%, 36.6% and 64% respectively. These returns beat competitors by a significant margin. • Valuation Ratios • Apollo Group’s Current P/E of around 19.7 is lower than most of its best performing competitors. • Its closest competitors performance-wise are Ambassador’s Group (EPAX), ITT Technical Services (ESI), Strayer Education, Inc. (STRA), and Universal Technical Institute (UTI). Apollo Group’s P/E, however, is below almost all of its best performing competitors.

5. Valuation • Ouma Summary: • It is estimated that Apollo Group’s intrinsic value is $68. This is based on a future expected P/E of 24. • It is believed that this P/E is reasonable given Apollo’s past performance, current operations, and future expected performance.

6. Other Factors and Summary • Other Factors • The Wilson Fund does not currently hold securities from the Educational Services Industry. Adding a stock from this industry would add to the diversity of the Wilson Fund, and somewhat reduce the overall risk of the Fund. • Slow recent EPS growth and the recent news over federal court inquiries into Apollo’s options program could present a buying opportunity. • The slow recent revenue and EPS growth could be a warning that Apollo may not perform as expected over the next 5 years. • Summary: • Apollo Group faces strong competition from other companies in its industry. • It also operates entirely within the educational industry, so it is susceptible to a large amount of single industry risk. • However, Apollo’s experience and good financial status mitigate these risks. • Lower P/Es, slower revenue growth and federal litigation are all factors that have kept APOL price down. • However, this situation is not consistent with most expectations of the company’s future. • It is likely that Apollo’s strong presence and focus within its industry, combined with ever increasing demand for college-level training, will cause Apollo to have strong earnings in the future. At a P/E of 24, and an EPS growth of about 11% per year, APOL is valuated at $68. A Margin of safety price of $47-$50 is recommended.