Apollo Group Inc.'s shares jumped Tuesday after a Deutsche Bank analyst raised his rating on the stock of the for-profit education company.
THE SPARK: Analyst Paul Ginocchio upgraded his rating on Apollo's stock to "Hold" from "Sell", saying that he sees some unrecognized asset value in the company and believes there is limited risk for the company's share price to slide further.
THE BIG PICTURE: Apollo's stock has been hammered over the past year, as have those of many for-profit education companies, amid major changes in the industry.
These companies enjoyed a big boom in enrollment when the recession first hit, but demand has since weakened. Increased criticism of the schools, new federal regulations and the still-difficult economy, which limits consumers' ability to spend, has weighed on enrollments. In turn, the sector's revenue and profitability has suffered.
The company's stock has lost about 60 percent of its value since March of 2012.
Apollo is also dealing with a pending accreditation issue for its University of Phoenix subsidiary because of alleged deficiencies involving its administrative structure and governance. This has added further uncertainty for investors. The company plans to appeal a recommendation by the accrediting body that it be put on probation. The appeals process is expected to be complete by the end of June.
THE ANALYSIS: The analyst said he does not expect enrollment trends to improve soon, in fact he expects them to continue to slide. But Ginocchio says that the market already has a low estimate on the value of the company's core University of Phoenix business.
The key to his rating change is that Ginocchio believes that Apollo has a solid cash value and an undervalued asset in its technology platform. Even if enrollment continues to slide, the analyst believes the company has a good cash value for investors.
Additionally, Apollo has invested heavily in its technology platform for use in its higher education programs. The company has expressed an interest in licensing part of this technology to other schools but has been prevented from doing so by certain rules. Ginocchio said the company will likely either find a legal solution or, if unable to do that, spin off the business. The analyst sees this technology as a valuable asset.
Ginocchio has a $17 price target for the company's stock.
SHARE ACTION: Shares of Apollo increased 59 cents, or 3.6 percent, to $16.79 by midday. Its stock remains at the lower end of its 52-week trading range of $15.98 to $43.80.