01-11-2013, 01:59 AM
Quote:Updated January 9, 2013, 6:41 p.m. ET
Apollo Warns of Sanction for University of Phoenix
By JOAN E. SOLSMAN
Apollo Group Inc. warned that the group that accredits its University of Phoenix is expected to recommend sanctioning the for-profit school by putting it "on notice" for unspecified areas of concern.
Worries about Apollo's accreditation and growth prospects helped stoke a selloff in the stock Wednesday. Shares in the company fell 7.8%, or $1.63, to $19.32 at 4 p.m. on the Nasdaq Stock Market NDAQ +0.30% .
Apollo has lost two-thirds of its market value in the past year, as it and others in the sector deal with flagging enrollment and scrutiny of their practices. University of Phoenix offers courses online and at 115 campuses and smaller learning centers across the country.
The Higher Learning Commission, a regional agency that accredits the University of Phoenix, has been working on a once-a-decade evaluation to reaffirm the school's accreditation. The agency informally advised Apollo Tuesday of a coming draft report, and Chairman and Chief Executive Gregory Cappelli said that evening that he expects the report to recommend putting the school "on notice" for "several areas of concern."
Accreditation is essential for schools to be eligible for Title IV student loans from the U.S. Department of Education, which represent the vast majority of the schools' revenue. Apollo booked more than 80% of its revenue from the loans in the latest fiscal year, as calculated under a rule that limits how much schools can receive.
Being "on notice" means the Higher Learning Commission found some course of action at a school that could result in it failing an accreditation standard.
It is less harsh than being put on probation, but both types of sanction require the institution to take corrective action and provide a written report.
Because Apollo doesn't have the draft report yet, Mr. Cappelli didn't elaborate about what the problem areas were. "When we get that information, there'll be a process to review it and to disclose as appropriate," he said during a conference call to discuss quarterly results.
In a note downgrading Apollo, Morgan Stanley analyst Suzanne Stein said recent areas of scrutiny at the university include faculty changes, student-to-teacher ratios and student default rates on loans.
The University of Phoenix's accreditation was under no immediate threat. Apollo has the chance to write to the agency to dispute any factual errors that company sees in a recommendation, should it come. If it is sanctioned, the notice period typically lasts one year. The Higher Learning Commission may withdraw accreditation if it ultimately finds the school isn't compliant, but institutions have the right to appeal.
The company is still at a "very early stage" in the review process with the commission, said Mark Brenner, chief of staff for Apollo Group and senior vice president of external affairs. He added this accreditation reaffirmation has been the largest the school has undergone.
First Analysis analyst Corey Greendale, who also downgraded Apollo, said he believes the University of Phoenix will likely remain accredited in the end, but the additional uncertainty might weigh on its stock.
Shares in other for-profit educators fell Wednesday as the largest among them faced the accreditation uncertainty. DeVry Inc. DV -0.63% stock sank 4.9% on the New York Stock Exchange. Strayer Education Inc. STRA -0.66% and Grand Canyon Education Inc. LOPE -1.23% declined 7.8% and 3.3%, respectively, on the Nasdaq market.
Similar accreditation worries have plagued the sector. Last summer, Bridgepoint Education Inc.'s BPI -1.37% flagship college was denied initial accreditation from another agency for failing to comply with certain standards, and Career Education Corp.'s CECO +4.29% stock gyrated when accreditation came under question.
Like peers, Apollo has been tightening its practices after facing public criticism over graduates' debt loads and job prospects.
On Tuesday, Apollo said its earnings and revenue fell in the company's fiscal first quarter as degreed enrollment declined again, prompting a downward revision to the top of its revenue guidance.
