By Damion Rallis, Senior Research Associate
Shares at the embattled for-profit education company Apollo Group Inc. (NASD:APOL) continue to spiral downward, as the company said on Monday that The Higher Learning Commission (the group that accredits its University of Phoenix) recommended the university be placed on probation after determining it is too closely tied to Apollo. Specifically, the Commission’s review concluded that the university has insufficient autonomy relative to its parent corporation “to assure that its board of directors can manage the institution, assure the university’s integrity, exercise the board’s fiduciary responsibilities, and make decisions necessary to achieve the institution’s mission and successful operation.” To make matters worse, the Commission also identified the following areas of concern: 1) retention and graduation rates; 2) sufficiency of Ph.D program faculty research activity; 3) reliance on federal student financial aid; 4) assessment of student learning; and 5) documentation of credit hour policies and practices with regard to learning outcomes of learning teams. Why is this important? The University of Phoenix represents more than 90% of Apollo’s revenue. Another one of Apollo’s entities, Western International University, was also recommended for probation.
While there will be no change in the accreditation status of University of Phoenix until the review and appeal are complete (expected by the end of June), what if the appeal fails? Apollo has an answer for that: “if University of Phoenix should lose its institutional accreditation, our business would be substantially impaired and we would not be able to continue our business as it is presently conducted.”
Of course, none of this is news to GMI Ratings subscribers. In January, we reported that the company revealed a whole new set of bleak financial results for the first quarter of fiscal 2013, including year over year quarterly operating income that was down 11.7% and University of Phoenix Degreed Enrollment that was off 14.3% over the same period. Considering GMI’s October 2012 report “Apollo Group Continues Its Freefall,” the continuing downward trajectory is hardly surprising.
Given the circumstances surrounding the company, the threat of litigation also continues to be a problem. GMI Ratings’ Litigation Risk Model scores suggest that the company is still carries high risks. Apollo Group has a 16% probability of Class Action Litigation occurring within the next 12 months. This places them in the 1st percentile of all companies in North America, indicating higher shareholder class action litigation risk than 99% of all rated companies in this region.
It is not clear if and when it will be safe for investors to jump back into Apollo’s shares. In some sense the well-publicized bounce back from near death in stocks such as Blackberry and Netflix make bottom fishing for 100% returns very tempting. However, investors must be aware of key difference in these stories. Unlike many companies, Apollo’s destiny is out of its own control and in the hands of regulators who have become levered to the public outcry against the for profit college business model. This continues to make the whole industry a target rich environment. For now it would be wise for investors to stand aside.