Zacks Analyst Blog Highlights: Vale S.A., Tinto, BHP Billiton, Strayer Education and Apollo Group

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Jan 18, 2011, 09:30 ET

CHICAGO, Jan. 18, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: Vale S.A. (Nasdaq: VALE), Tinto plc. (NYSE: RIO), BHP Billiton Ltd. (NYSE: BHP), Strayer Education Inc. (Nasdaq: STRA) and Apollo Group Inc. (Nasdaq: APOL).

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Here are highlights from Monday's Analyst Blog:

Vale Upgraded to Outperform

We upgrade our rating on Vale S.A. (Nasdaq: VALE) from Neutral to Outperform based on the rising iron-ore demand in China, world's largest iron-ore importer, and the expectations of higher iron-ore price in fiscal 2011.

Iron-ore demand in China is growing and is expected to behave in the same manner in the medium term due to its continued economic growth and urbanization. Currently the total urban population of China is around 500 million and is estimated to double in the next 15 years.

China's steel consumption is expected to increase 3.5% in 2011. China is touted to remain the largest consumer of metals in the future. Hence, the medium-term outlook for the metal remains encouraging and should have a positive impact on iron-ore companies like Vale, Rio Tinto plc. (NYSE: RIO), and BHP Billiton Ltd. (NYSE: BHP).

Decline in Indian exports of iron ore also favors Vale. We believe that the stock has a significant long-term upside potential due to the company's position as a low cost metal producer and the improvement in economic conditions. Vale's huge capital budget of $24 billion in fiscal 2011 supports numerous strategic acquisitions, which are likely to be beneficial in the long run.

Further, Vale reported excellent results during the third quarter of fiscal 2010 with an EPADS of $1.13 compared with only $0.31 in the year-ago quarter. It also surpassed the Zacks Consensus Estimate of $1.03.

The reason for the increase was a considerable increase in prices of metal and minerals, attributable to the huge leap in metal demand driven by the global economic recovery. With the expectation of a continued rise in iron-ore demand and prices, fiscal 2011 estimates went up by 16 cents per share. Thus, the stock also currently retains its short term "Buy" rating (Zacks #2 Rank).

Bearish on Strayer Education

We recently downgraded our recommendation on Strayer Education Inc. (Nasdaq: STRA) to Underperform with a price target of $112.00. Earlier we had a Neutral rating on the stock. The company also holds a Zacks #5 Rank, which translates into a short-term 'Strong Sell' rating.

The educational institute, which offers degree programs in business administration, accounting, information technology, education and criminal justice, witnessed a 20% fall in new student enrollment for the winter 2011 term compared with a 16% growth experienced in the same period last year.

Given the decline in new student enrollment for the winter 2011 term, Strayer Education provided four hypothetical situations, but did not give any official guidance. The for-profit education company informed that if annual enrollment drops 5%, its revenue may remain flat or fall 1% and earnings may lie between $7.50 and $7.70 per share. If enrollment rises 5%, Strayer Education hinted that revenue may witness a growth of 9% to 10% and earnings may fall in the range of $10.10 to $10.30.

The Arlington, Virginia-based Strayer Education also notified that if enrollment remains flat with the 2010 level, revenue would register a growth of 4% to 5% and earnings would be in the range of $8.80 to $9.00 per share.

The company also hinted that if enrollment rises by 13%, revenue may increase between 17% and 18% and earnings would be in the range of $11.30 to $11.50 per share, as projected earlier. The guidance includes a 5% increase in tuition fees effective January 1, 2011, and the opening of eight new campuses in 2011.

Following these, a negative sentiment is palpable among the analysts and we are witnessing a fall in the Zacks Consensus Estimates. The fourth quarter 2010 and the first quarter 2011 Estimates dropped 2 cents and 40 cents, to $2.64 and $2.63, respectively, in the last 7 days. Fiscal 2010 and 2011 Estimates dipped by 2 cents and $1.71, to $9.62 and $9.21, respectively, in the last 7 days.

The current potential risk looming over the education sector is the regulation proposed by the Department of Education. The Department of Education proposed that an educational program could only qualify for Title IV funds if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios.

The company derives a major portion of its revenues from federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans. Consequently, for-profit education companies may witness declines in student enrollments.

The sector bellwether Apollo Group Inc. (Nasdaq: APOL), which recently posted first-quarter 2011 results, said that total degreed enrollment dipped 3.8% compared with the year-ago quarter, as new degreed enrollment plunged 42.4%. However, the company's quarterly earnings of $1.63 per share outpaced the Zacks Consensus Estimate of $1.35, providing some cushion to the stock.

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