Risk Reward Balance Capella - Analyst Blog
July 20 2011 - 1:30PM
Zacks
Currently, we have a Neutral
recommendation and a price target of $47.00 for Capella
Education Company (CPLA), a provider of online education.
The company’s strong focus on working adults and exclusive online
education has enabled it to establish a healthy position in the
for-profit post-secondary education industry.
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 have supported 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 risk facing 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
track record.
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.
Recently, Capella 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 a foothold in the
lucrative international market as RDI has a strong presence in the
international higher education market.
Given the pros and cons we prefer
to have 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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