Neutral Recommendation on APEI – Analyst Blog

American Public Education Inc. (APEI) has carved a unique niche for itself in the online post secondary education industry by focusing on recruits serving the U.S. military and public service communities. The company’s part-time programs are well-suited to irregular and extended work schedules of these personnel. This provides a significant upside potential for the company.

American Public Education has witnessed an impressive revenue growth over the last three fiscal years. During 2007-2009, revenue surged from $69 million to $149 million recording a compounded annual growth rate of 47% driven by greater student satisfaction and referral rates, regional accreditation and access to Title IV programs. Furthermore, management expects revenue increases to be within 36% to 39% in fiscal year 2010.

The company’s sustained efforts to expand educational programs have helped boost enrollments. Net course registrations climbed 39% year over year to 64,900 in the first-quarter 2010. American Public Education expects net course registrations to rise between 35% and 38% in fiscal year 2010.

Furthermore, the company’s debt-free balance sheet, and healthy cash reserves augur well for future performance.

However, American Public Education operates in a highly fragmented post secondary education market and faces intense competition from traditional public and private two-year and four-year colleges as well as other for-profit schools, particularly those that offer online learning programs.

Further, the company’s online classroom relies heavily on a third party software (Educator) developed by Ucompass.com. Financial impairment of Ucompass.com or its possible acquisition by a competitor will cause significant difficulties for American Public Education in terms of maintaining and updating the software. This will negatively impact the company s operating performance, damage its reputation, and limit the ability to attract and retain students.

Given the pros and cons we prefer to be Neutral on the stock. Moreover, the Zacks #3 Rank, which translates into a short-term ‘Hold’ rating, correlates with our long-term recommendation.