American Public (APEI) Beats Q2 Earnings; Q3 View Weak

American Public Education, Inc. APEI reported better-than-expected second quarter results, beating the Zacks Consensus Estimate for both earnings and sales. However, the online provider of higher education issued a lower-than-expected earnings guidance for the next quarter.

Earnings Beat

Second-quarter 2016 adjusted earnings of 41 cents per share surpassed the Zacks Consensus Estimate of 39 cents by 5.1%. Earnings were in line with management's expected range of 36 cents–41 cents.

However, adjusted earnings per share declined 2.4% year over year due to lower revenue and margins.

Revenues and Enrollment

Total revenue of $76.7 million exceeded the Zacks Consensus Estimate of $75.0 million by 2.3%. However, revenues dipped 4.5% year over year, in line with the company's expected range of 4–7%. Revenues declined at both American Public University System (APUS) and Hondros College of Nursing (HCON).

Revenues dropped 4.2% at APUS to $69.5 million due to lower enrollment trends, thereby neutralizing the increase in revenues from higher tuition fees implemented last year.

Total enrollment at APUS slipped 8%, owing to a decline in enrollment of students using Federal Student Aid FSA and Tuition Assistance TA program – a trend over the past few quarters.

The decline was in line with management's expected range of 7–10% decline. Enrollments by continuing students fell approximately 5% year over year.

New student enrollments (student starts) at APUS fell 22%, which was also in line with the company's expectations of a decline in the range of 19–24%.

Quarterly revenues, enrollment levels and earnings were affected by persistent volatility as well as softness in enrollment of students under FSA and TA.

New enrollment of students using FSA plunged 38%, while those using TA slipped 17%.

TA enrollments were hurt by the continued volatility in the military, changes in the administration of TA program by the Department of Defense and other possible factors.

FSA Enrollment trends were hurt by increased competition, especially among online programs. The company's efforts to improve the quality mix of students through a new admissions process and change in the method of FSA disbursements adversely impacted enrollment trends.

New enrollment of students using veteran benefits decreased 1% year over year while those for students using cash and other sources declined 7%.

Revenues at Hondros College of Nursing fell 6.1% to $7.2 million due to lower enrollment trends. Total enrollment at the Hondros College Nursing Programs (HCON) slumped approximately 8%, while starts decreased 13%.

Hondros' enrollments were hurt by curriculum changes (implemented in Jan 2016) and difficult completion requirements in its practical nursing diploma program. The Jan 2016 curriculum change resulted in fewer students choosing to pursue their studies at Hondros particularly in the RN-to-BSN Program.

These factors are anticipated to hurt Hondros enrollments in the third quarter as well.

Profits Decline

Operating income declined 7.8% to $10.7 million as profits declined both at APUS and HCON. Operating margins declined 50 bps year over year to 13.9% in the quarter as expenses declined at a lower rate than revenue.

Costs and expenses were down 3.8% to $66.1 million in the quarter, chiefly due to lower bad debt and advertising expenses. Bad debt expense ratio improved 260 bps to 2.3% in the second quarter.

The company's focus on improving student persistence has been hurting enrollment trends and overall revenues. However, the same factors led to lower bad debt expense.

Third-Quarter 2016 Outlook

The company issued third-quarter 2016 guidance.

Total revenues are expected to decline by 3–6%. Earnings per share are expected to be between 26 cents and 31 cents. The earnings guidance fell short of the Zacks Consensus Estimate of 34 cents.

Total enrollments at APUS are expected to decline in the range of 10–13%, while new enrollments are expected to decrease 23–27%.

At HCON, total enrollments are projected to decline about 11% while starts are expected to fall about 20% during the quarter.

American Public currently carries a Zacks Rank #5 (Strong Sell).

AMER PUB EDUCAT Price, Consensus and EPS Surprise

AMER PUB EDUCAT Price, Consensus and EPS Surprise | AMER PUB EDUCAT Quote

Stocks to Consider

Some better-ranked schools include Apollo Education Group, Inc. APOL, New Oriental Education & Technology Group Inc. EDU and Lincoln Educational Services Corporation LINC. While Lincoln Educational Services sports a Zacks Rank #1 (Strong Buy), Apollo Education and New Oriental Education carries a Zacks Rank #2 (Buy).

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