SEC inquiry into Apollo raises specter of regulatory investigations in for-profit ed sector

Sector Snap: For-profit education providers sink

NEW YORK — Shares of for-profit education companies tumbled Wednesday a day after Apollo Group Inc., one of the largest and oldest of the companies, said the Securities and Exchange Commission had launched an “informal inquiry” into its revenue accounting practices, its second SEC probe this year.

“We are confident that the SEC’s accounting issue is specific to (Apollo),” wrote RBC Capital Markets analyst Robert Wetenhall in a note to investors Wednesday. DeVry Inc., another of the more-established higher education providers, said on its Tuesday evening earnings conference call that it had not been contacted by the SEC and was not concerned. But the rest of the sector will likely be under pressure “until the dust settles.”

Morgan Stanley and RBC’s Wetenhall both downgraded Apollo on Wednesday. Meanwhile, Oppenheimer & Co. upgraded DeVry to “Outperform” from “Perform” after its strong earnings report Tuesday.

DeVry shares rose $2.37, or 4.3 percent, to $57.25 in afternoon trading, bucking the general sector trend.

Apollo shares tumbled $12.64, or 17 percent, to $60.33.

SEC inquiries often end without finding harm done by the company. Still, the probe comes at a time when the Department of Education is keeping an eye on the sector at large. In a Congressional hearing earlier this month, Mary Mitchelson, an inspector general of the Education Department, described investigations of different schools’ attendance-tracking and financial aid practices. She said the government would continue to pursue cases of “diploma mills” and eligibility exams.

In February, a separate division of the SEC said it was looking into Apollo’s revenue recognition practices. Nearly all of revenue of Apollo, which owns the University of Phoenix, comes from student tuition. Federal student loans from the government make up nearly 90 percent of the University of Phoenix’s tuition income.

“We plan on cooperating fully with the SEC,” said Apollo CFO Brian Swartz on a conference call with analysts Tuesday. He added that he did not know the focus of the SEC’s new inquiry.

The “revenue recognition” issue revolves around how Apollo determines when a student drops out of a class, the refund that student gets, and how much income Apollo can leave on its balance sheet, and for how long.

Apollo says it stops recognizing revenue when a refund is processed for a student that has dropped a class, according to attendance records, a “seemingly straightforward” method, said Morgan Stanley analyst Suzanne Stein.

The worst-case scenario would be an accounting restatement and fraud charges as a result of the inquiry, Stein said. She added that was unlikely, and also that there was “no reason” to think the inquiry would be expanded to the rest of the industry.

That didn’t stop shares of other higher education providers from tumbling, however.

Education Management Corp., whose initial public offering was last month, dropped $1.22, or 5.1 percent, to $22.61; exclusively online companies Bridgepoint Education Inc. and Grand Canyon Education Inc. both tumbled more than 7 percent; Career Education Corp. fell $1.27, or 5.4 percent, to $22.22; ITT Educational Services Inc. slid $6.01, or 6 percent, to $93.47; Strayer Education Inc. fell $4.76, or 2.2 percent, to $213.95; American Public Education Inc. lost $1.43, or 4.1 percent, to $33.18; Corinthian Colleges Inc. dropped 32 cents to $17.09; and Lincoln Educational Services sank $1.34, or 5.8 percent, to $21.86.

Shares of Capella Education Co. edged up less than 1 percent following its better-than-expected results Tuesday.

“Some investors have opted to scrutinize (Apollos)’s practices on student refunds and bad debt expense, the implication being that this could be the beginning of an industrywide review of practices,” wrote Wedbush Morgan analyst Ariel Sokol in a note to investors Wednesday as he reiterated his “Underperform” rating on Apollo and cut its target price to $65 from $80.

The Government Accountability Office in September released a report critical of the for-profit schools’ student loan default rates. The GAO said many proprietary schools admitted unqualified students who had a greater tendency than other students to drop out, let students stay enrolled despite a lack of academic progress and also misrepresented themselves to prospective students. That prompted the Congressional hearing on Oct. 14 at which Mitchelson testified, along with other GAO and Education Department officials.