Continuing Education, Domestic, For-Profit, Investors, Required - Written by on Saturday, August 6, 2011 10:41 - 0 Comments

Washington Post Co. Revenue Slides in Q2 with Challenges at Kaplan

Photo by Matthew Bradley from Flickr via Creative Commons licenseThe Washington Post Co.’s propped up its storied newspaper division as it reaped big revenues from its Kaplan educational divisions in recent years. But quarterly results for the second quarter shows Kaplan struggling.

The company earned $45.6 million, or $5.74 per share, down by roughly 50% from the $91.9 million, or $10 per share, a year ago. Revenue fell 10 percent to $1.07 billion.

A big reason for the decline is the new regulatory environment that for-profit colleges, including Kaplan, now face. Kaplan offers testing and test-preparation services and also runs several digitally based high school and college programs. The federal government has investigated and introduced new rules to improve quality at these schools that tend to cater to adult learners and lower-income students.

Critics believe Kaplan and other schools are reaping government loans by recruiting students with little chance of graduating and leaving the students with large debts. The company told investors that it’s now accepting fewer students and allowing those students to withdraw if they can’t keep up. That meant 78,500 students at Kaplan’s higher education division in June, a 30% drop from 112,200 a year ago. The Kaplan division saw revenue slide by 15%, or $114 million. The Post Co. said it expects similar declines for the rest of 2011 and it’s planning cost cuts to preserve its cash flow.

“The Kaplan Higher Ed business is substantially contracting in size, with expected 2011 operating profit of $167M declining by 60% from $416M that the company posted in 2010,” wrote UBS analyst Ariel Sokol, in a note. “However, we note that in 2011 Kaplan Higher Ed by our estimation will still represent the lion share of the company’s operating profit (50%).”

Earlier this quarter, the Post Co. announced a shake-up of executives at the Kaplan Inc. Shortly after, Kaplan subsidiary CHI Institute, announced it would be paying a $1.6M fine to settle a case involving undelivered training to students.

Despite the lower profits and revenues, the company’s stock increased more than 6% to $391.06 on Friday afternoon as the entire market also rose.

Here’s the full Washington Post Co. press release


Meanwhile, UBS analyst Ariel Sokol weighs in post-earnings, pointing out several unknowns in the Washington Post Co. stock related to Kaplan: 

As with other postsecondary companies in our coverage universe, we are unclear as to how starts could trend given glaring challenges in the U.S. economy with declining consumer confidence.  We do not know if working adults will seek to pursue higher education if the economy declines this time around given an increasing reluctance by adults to take on debt.  We also don’t know if reputational damage of “for-profit” schools would cause working adults to pass on Kaplan were the economy to deteriorate.  Finally, we don’t know if adults most likely to pursue a degree did so in 2009/2010, meaning that the company might not see a countercyclical benefit in the case of another economic downturn. 

Sokol was surprised the company didn’t buy back shares in the quarter. 

We do not know why the company opted not to buy back shares.  We presume that no change in the corporate capital allocation strategy has taken place, and remind investors that Q2 tends to be the company’s seasonally weakest quarter in terms of free cash flow generation… Part of the bull thesis in our opinion rests upon the ability of the company to 1) buy back shares; and 2) lever up the balance sheet to buy back shares, as the company still has net cash and generates cash flow from both the cable and television broadcasting businesses. We presume that the company likely continues its share repurchase program in Q3.  However, were it not to do so it would raise questions as to how management is viewing the company’s ability to generate cash flow in the face of challenges at the Kaplan unit.

And another major unknown are state attorney general investigations in Kaplan’s work in Massachusetts, Illinois and Florida. Career Education (a peer company) is under investigation by New York’s Attorney General’s office for possible improper reporting of placement rates. 

We think that the stock could be range-bound for the foreseeable future until the legal overhang over the company abates…. We do not know what may arise from the state attorney general inquiries – it could be as simple as a monetary fine, which is what we think at minimum could happen.  We acknowledge risks such as institutions losing accreditation (and thus losing Title IV funds, effectively shutting down the institution) and/or no longer being allowed to practice in the state.  For investors, such risks are difficult to quantify, and the timing of such catalysts are difficult to predict.

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