Capella Upped to Neutral - Analyst Blog
May 03 2011 - 9:51AM
Zacks
We recently upgraded our recommendation on Capella
Education Company (CPLA), the provider of online
education, to Neutral with a price target of $52.00 following
better-than-expected first-quarter 2011 results. Earlier, we had a
Sell rating on the stock.
Capella’s first-quarter 2011 earnings of 97 cents a share beat
the Zacks Consensus Estimate of 82 cents, and grew 9% from 89 cents
earned in the prior-year quarter. Management hinted that the growth
in enrollment and revenue was marginally above expectations, which
lends support to the bottom-line.
Total active enrollment, which climbed 7.3% to 39,904 from the
year-ago quarter, betters the 4.5%-6.5% guidance range provided
earlier. The quarterly revenue of $111.4 million jumped 10% from
the prior-year quarter, and remained in line with the Zacks
Consensus Estimate. The increase in the top-line was slightly above
management’s previous expectation of 8.5%-9.5% growth.
However, we observe that the growth in enrollments in the
quarter under review has decelerated sequentially. After increasing
16.2% in fourth-quarter 2010, the rate of growth in enrollment
dropped sharply to 7.3% in first-quarter 2011. Capella now expects
total enrollment to fall by 1% to 3% in second-quarter 2011.
Further, revenue is expected to remain flat or climb 2% in
second-quarter 2011.
The current potential risk looming over the education sector is
the regulation proposed by the Department of Education that is
weighing upon students’ enrollments and the company’s profits. The
Department of Education has 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 institutions are under the scanner due to the rise in the
default rate of student loans, and are now being asked to submit
information relating to recruitment procedures and use of student’s
grant.
Capella cautioned that new enrollment in second-quarter 2011 is
expected to tumble by approximately 40%. Management hinted that
other for-profit education institutes facing tougher norms are
chasing Capella's students who are financially sound and have
better loan repayment rates.
The company generally focuses on working adults, and in order to
draw students it is also ramping up its marketing and promotional
expenditures, which rose 17.9% to $35.3 million during the quarter.
The company also hinted at hiking the tuition fees for 2011-2012
academic year, and proposed to offer scholarships and grants to woo
students.
To counter sluggishness in students’ enrollment, education
companies are also resorting to restructuring their cost base.
Capella said that it has lowered its headcount by about 120
non-faculty members and incurred a charge of about $1.9 million for
the purpose in the quarter. Management hinted that the eliminations
will result in cost savings of approximately $12 to $12.5 million
per year.
Given the pros and cons we prefer to have a long-term Neutral
rating on the stock. Moreover, Capella, which competes with
Apollo Group Inc. (APOL) and Strayer
Education Inc. (STRA), holds a Zacks #3 Rank, which
translates into a short-term Hold recommendation.
APOLLO GROUP (APOL): Free Stock Analysis Report
CAPELLA EDUCATN (CPLA): Free Stock Analysis Report
STRAYER EDUC (STRA): Free Stock Analysis Report
Zacks Investment Research
Apollo Education Group, Inc. (NASDAQ:APOL)
Historical Stock Chart
From May 2024 to Jun 2024
Apollo Education Group, Inc. (NASDAQ:APOL)
Historical Stock Chart
From Jun 2023 to Jun 2024