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University of Phoenix stock gets passing grade

Dear Mr. Berko: I recently hired a University of Phoenix graduate over a University of Florida graduate because I felt the Phoenix student would give me more bang for my buck in our accounting department. I’m interested in owning shares of this for-profit school because I think they do a superb job preparing people for the business world. Please tell me about this company and if you would recommend their stock, which is called the Apollo Group. –E.N., Gainesville, Fla.

Dear E.N.: The Apollo Group (APOL, 52-week high of $76.86 as of Oct. 15), which owns the University of Phoenix, may not have the panache of a University of Florida but gives more students a superb education for enormously cheaper, certainly more effectively and in a lot less time than the University of Florida.

And the recent brouhaha of student financing aside, APOL is a compelling stock for long-term gains. In fact, our public colleges would do well to follow in APOL’s footsteps. For instance, this year APOL has an enrollment of 478,000 students with a budget of $4.8 billion. This year, the University of Florida has an enrollment of 50,000 students with a budget of $4.9 billion. APOL employs 49,800 teachers and staff with a ratio of nine students for each staff member. Meanwhile, the University of Florida, with more than 900 buildings on a 2,000-plus-acre campus and a staff of 16,000, has a ratio of three students for each staff member.

And while the University of Florida continues to raise its rates and beg the legislators for more money because its budget runs more red ink than Chairman Mao’s Little Red Book, APOL expects to make an $830 million profit.

APOL is the Wal-Mart of the education industry. They know how to deliver a good education without coddling students, without frivolous fluff, without the useless feel-good curriculum, without the lavish student unions, dormitories, sports complexes, private health care, a police force or elaborate administration buildings that look like Taj Mahals. APOL should be every state’s blueprint for a public education system.

In 2007, 2008 and part of 2009, APOL traded as high as $90s. Its success and perception as a solid venue for learning have enabled revenues to grow more than eightfold in the past 10 years, from $600 million to nearly $5 billion this year. In that time frame, earnings have grown by 1,300 percent and management has never asked the state or federal government to pay for teaching salaries, cover maintenance, build sports complexes, provide housing or pay administration salaries. APOL’s only debt was a $120 million bond issue in 2009 to raise its working capital.

I realize there’s a bias between an APOL degree and a degree from a state university, but that’s beginning to disappear. Some businessmen with whom I talk prefer to hire a University of Phoenix grad, rather than a state college grad, because the APOL grad is often more mature, better focused, wants to improve job skills, is more career-oriented and has a better grip on reality than the state college student who needs six years to graduate and is pampered by the system on weekdays so he/she can binge on weekends.

Because APOL is an enormously less expensive degree than a public college and because many employers probably prefer a University of Phoenix graduate, APOL’s revenues and earnings should continue to outperform the economy. Value Line thinks APOL can be a $120 issue in several years, Argus rates it a buy, Ned Davis Research rates APOL as a buy, Reuters has it as an outperform, while Stifel Nicolaus and BofA Merrill Lynch give APOL a five-star ranking.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.

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