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By Erik Kobayashi-Solomon | 06-04-2010 11:52 AM

Market Mis-Grading Apollo's Prospects

Morningstar analyst Todd Young educates investors on why the market is underappreciating for-profit education company Apollo Group.

Securities mentioned in this video
APOL Apollo Education Group Inc

Erik Kobayashi-Solomon: Hi, I am Erik Kobayashi-Solomon, co-editor of Morningstar's OptionInvestor. And today it's my great pleasure to welcome senior equity analyst Todd Young to talk about Apollo.

Todd, thanks for coming.

Todd Young: Thanks for having me. I appreciate it.

Kobayashi-Solomon: So, in the option portfolios we've got a position in Apollo. I just wrote another QuickShot article about Apollo. So, this is a bullish position. I know you're very bullish on the stock. I just want to talk a little bit about that company.

Young: Sure, absolutely.

Kobayashi-Solomon: So, the way I understand Apollo--kind of Apollo's business model, they are accredited; they have accreditation. So they're able to charge a lot of money for their classes. But because they don't have buildings, they don't have to spend a lot on brick-and-mortar. So, basically it's all about profit margin.

Young: Sure.

Kobayashi-Solomon: If I got that right?

Young: Yeah. So there is two forms of accreditation. There is regional accreditation and national accreditation. And…

Kobayashi-Solomon: It's the regional, that's the better, right?

Young: The regional is better, which would sound a little counterintuitive. But the regional is the same accrediting bodies that--there are six of them--that accredit your Harvards, your University of Chicagos, your University of Virginias, your large state schools and things like that. So, Apollo has that same accreditation as those schools have.

Kobayashi-Solomon: So, in other words, Apollo has got the same--kind of the same credentials as a Yale or something?

Young: Yes, the same--and obviously, it doesn't have the same brand reputation as one of those schools--but it has the same accreditation as those. And their typical tuition is--a good rule of thumb is for-profit schools that have this regional accreditation charge probably above what an in-state tuition would be at a state school, but below what a private school would be charging or maybe an out-of-state tuition depending--obviously depending on the state.

So, they are able to charge these rates because financial aid limits are typically going to be set based on the cost at traditional schools. I consider traditional schools as your private and your public institutions, private--you know like Ivy Leagues and things like that.

So, they don't charge as much per se, or sometimes more, sometimes less, but they are able to charge those rates because financial aid is based on those schools' tuition costs. But they don't have the same cost structure as those programs. They don't have the dorms. They don't have sport stadiums. They're also not offering classes in history and musical studies. They're focusing on…

Kobayashi-Solomon: It's really kind of very professional focus.

Young: Yes, career focus. These schools are looking to put people into degrees where they think they can get them a job afterwards.

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