Capella's International Leap - Analyst Blog
July 18 2011 - 5:30AM
Zacks
Capella Education
Company (CPLA), the provider of online education, recently
announced the buyout of Resource Development International Ltd.
(RDI), an autonomous distance learning provider of U. K., for $14.9
million.
The all cash deal will enable
Capella to gain foothold in the lucrative international market as
RDI has a strong presence in both the international and U. K’s
higher education market.
Further, RDI operates with the top
100 universities in the U. K., thus allowing Capella to gain access
to a large number of candidates. Further, it will facilitate the
company in better serving the learner’s community through its
educational expertise and web-based learning platform.
Moreover, the conformity also
underlines that Capella will make a supplementary payment of
approximately $6.4 million to RDI if it gains the right to
autonomously certify its degrees. RDI has applied to the British
Government (Privy Council) for the approval of the Taught Degree
Awarding Powers (TDAP).
Management stated that the deal
will be accretive to the company’s earnings in fiscal 2013, while
also moderately affecting the earnings of fiscal 2011 and 2012.
Capella focuses on working adults,
and in order to draw students, it is also ramping up its marketing
and promotional expenditures. The company also hinted at hiking the
tuition fees for 2011-2012 academic year, and proposed to offer
scholarships and grants to woo students.
However, 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 profitable employment, including 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.
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
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