Market Overview

Apollo Group Says There Could be Sanctions on University of Phoenix

Apollo Group Inc. (NASDAQ: APOL) is down 1.22 percent Thursday on news that the University of Phoenix is expecting sanctions from the group that accredits the school.

The Higher Learning Commission has been working on the school's once-every-10-years reaccreditation process. Apollo Chairman and Chief Executive Gregory Cappelli said the commission informed the school Tuesday that a forthcoming draft report will recommend putting the school "on notice" for several “areas of concern.”

The areas of concern remain unspecified, however, Morgan Stanley downgraded Apollo yesterday to Equal-Weight, noting, among other issues, "new accreditor problems” that make it difficult to recommend the stock with conviction.

First Analysis analyst, Corey Greendale, also downgraded Apollo. Greendale says that although he believes the University of Phoenix will be reaccredited, the accreditation uncertainty might weigh on its stock.

Accreditation allows schools to be eligible for Title IV student loans from the U.S. Department of Education. This represents the vast majority of revenue for most schools. Apollo received more than 80 percent of its revenue from such loans in the latest fiscal year, as calculated under a rule that limits how much schools can receive.

"On notice" indicates the Higher Learning Commission found some course of action at the school that could result in it failing an accreditation standard. It is not as harsh as being put “on probation,” but still requires the institution to take corrective action and submit a written report.

This news follows poor guidance from the company earlier in the week. Shares of the company fell 7.8 percent, or $1.63, to $19.32 on Wednesday.

The company is still at a "very early stage" in the review process with the commission, said Mark Brenner, chief of staff for Apollo Group and senior vice president of external affairs. He added this reaccreditation has been the largest the school has undergone.

Like others in the for-profit education sector, Apollo has been tightening its practices after facing public criticism over student debt loads and poor job prospects. The tarnished reputation that shows little sign of improving has caused investors to question whether for-profit schools are good for their portfolio.

On Tuesday, Apollo said its earnings and revenue fell in the company's fiscal first quarter as degreed enrollment declined again, prompting a downward revision to the top of its revenue guidance.

Shares in other for-profit educators were mixed Thursday as news about the Phoenix reaccreditation uncertainty spread.

DeVry Inc. (NYSE: DV) is unchanged at midday while Strayer Education Inc. (NASDAQ: STRA) is up 0.5 percent and Grand Canyon Education Inc. (NASDAQ: LOPE) is down 1.5 percent.

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