Apollo Group

**teenvestor** Fri Mar 24, 2006 9:08 am

Apollo Group
I found Apollo Group while browsing through Gurufocus' potential bargains it's down 21% since Ruane Cuniff bought it.

Company Description

According to their annual report Apollo Group has been providing higher education to working adults for over 30 years. They offer their programs and services at 90 campuses and 154 learning centers in 39 states, Puerto Rico, British Columbia and Alberta.

They offer this through multiple subsidiaries:

Apollo Group
University of Phoenix
Institute for Professional Development
Western International University
Axia College of Western University
College of Financial Planning

Financials

Leverage

D/E

2002 2003 2004 2005 TTM

0.02 0.01 0.03 0.11 0.12

Debt/Capital

2002 2003 2004 2005 TTM
0.02 0.01 0.02 0.06 0.06

Current Ratio

2002 2003 2004 2005 TTM
2.76 2.83 1.84 1.61 1.52

Currently Apollo has an excellent balance sheet, great debt to equity and capital ratios plus good current ratios. Also Apollo has about 3.75 times more cash then debt as of the last quarterly report.

In the past 10 years book value has grown 685% total.

Efficiency

Return on Capital

2002 2003 2004 2005 TTM
19% 21% 24% 52% 57%

Return on Equity

2002 2003 2004 2005 TTM
20% 21% 25% 58% 64%

Return on Assets

2002 2003 2004 2005 TTM
14% 16% 17% 32% 32%

Apollo has excellent management efficiency ratios. They have ROE in excess of 60%, a good sign that we're looking at a great company.

Profitability

Gross Margin

2002 2003 2004 2005 TTM
51% 54% 57% 58% 58%

Net Margin

2002 2003 2004 2005 TTM
14% 16% 13% 18% 18%

Apollo has satisfactory margins, that are growing at a sufficient pace to keep earnings growing at a good rate as well.

Valuation

Analysts predict 18% annual growth over the next five years. I'll go a little more conservative and predict 12% annual growth for the next ten years and 4% after this yields a DCF value of $67.63 per share, a margin of safety of 23% at the current price.

According to Quicken Apollo has to grow earnings only ~6% annually over the next ten years to justify its current stock price, my assumption of 12% growth implies a 50% margin of safety.

Apollo's average PE over the past five years is 57 the current PE is 20.5 'reversion to the mean' would imply stock price growth of 278% to revert to the mean PE.

Conclusion

Apollo has an excellent business model, which Morningstar awards a 'wide moat', great, experienced, management and good financials.

I'm not entirely comfortable with the current valuation, 'past performance is not indicative of future performance', 57 is an extremely high PE and it would be foolish to assume a company with a PE of 21 would revert back to that high a PE. Quicken assumes 6% terminal growth which I would downplay greatly (growing 6% for eternity will make Google look overvalued) and will not take the Quicken assumption very seriously. The valuation I feel most comfortable with is the DCF, this implies a 23% margin of safety, thought I would pay up for a business of this quality, I want at least a 30% margin of safety before committing the money in my concentrated portfolio.