Apollo Group Inc, Slowing Growth But Great Economics

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The pain of missing a trade because of price can sometimes haunt an investor for years. For me, Apollo (APOL) was the one that got away. I had missed putting on a trade because I had been too sticky with the price and had regretted ever since. Seeing the stock soar was almost too painful to bear, but maybe this an opportunity to make amends.

The stock peaked in June '04 and has been steadily trending down, but last night's profit warning brought the stock down another 15%.

For-profit schools fill the gaps left by the traditional universities and Apollo is by far the biggest and best managed in the pack.

The economics of the business is incredible, combining high profit margin and low capital requirement, the business is a cash machine. Gross Profit margin was 58%, Operating Margin 32% and even at the Net level 20%. The company made $444mil in profits supported by assets of only $1,302mil or a ROA of 34%.

Apollo's operations throws up tons of cash. The company spent $1.35 billion of its free cashflow over the past 2 financial years buying back its stock (not at the most intelligent of prices I must admit). Still the company sits on a net cash hoard of $200m and will generate free cashflows in excess of $500mil this financial year.

Valuation has compressed significantly in the past 2 years on the back of slowing growth. Having said that, growth is still expected to be in excess of 10% even after last night warning. P/FCF for this year is conservatively 17x. DCF even with moderate expectations of growth, comes in above $65 per share. Not quite 60 cents for the dollar, but do I want to risk missing it again? What about writing a put? Hmmm...

Not A Lemming