Capella Beats on Bottom Line - Analyst Blog
July 27 2011 - 6:30AM
Zacks
Capella Education
Company (CNLA), the provider of
online education, recently delivered better-than-expected
second-quarter 2011 results. The quarterly earnings of 89 cents a
share beat the Zacks Consensus Estimate of 90 cents, and grew 25.1%
from 76 cents earned in the prior-year quarter.
Behind the
Headline
Total active enrollment
dropped 1.5% to 38,072 during the quarter. Management had earlier
guided enrollment to fall by 1% to 3%. New enrollment plunged 41.6%
reflecting tough market conditions, changes with respect to program
accreditation and stringent admissions criteria.
The quarterly revenue of
$106.4 million rose 1.2% from the prior-year quarter but fell short
of the Zacks Consensus Estimate of $107 million. The increase in
the top line dovetails with management’s guidance range of flat to
2% growth. Capella now expects revenue to fall by 2.5% to 4% in
third-quarter 2011.
Operating income for the
quarter jumped 6.3% to $23.9 million, whereas operating margin
expanded 110 basis points to 22.5%. Capella now expects operating
margin in the range of 13% to 14% for third-quarter
2011.
Falling
Enrollment
We observe that Capella is
witnessing a fall in enrollment. After increasing 7.3% in
first-quarter 2011, total active enrollment slipped 1.5% in the
second quarter. Capella now expects total enrollment to fall by 6%
to 8% in third-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 proposed
that an educational program could qualify for Title IV funds, only
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 third-quarter 2011 is expected to tumble by
approximately 30%. Management hinted that other for-profit
education institutes facing tougher norms are chasing out 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 7.8% to $30.8 million during
the quarter. To counter sluggishness in students’ enrollment,
education companies are also resorting to restructuring their cost
base.
Other Financial
Details
Capella ended the quarter
with cash and cash equivalents of $72.2 million, shareholders’
equity of $189.1 million and no debt. Cash flow from operations for
six-month period ended June 30, 2011, was $45 million.
During the quarter under
review, the company repurchased 529,000 shares, aggregating $25.6
million. Capella indicated that it has $60 million at its disposal
under its share repurchase authorization.
Currently, we have a
long-term "Neutral" rating on the stock. However, Capella, which
competes with Apollo Group
Inc. (APOL) and
Strayer
Education Inc. (STRA), holds a Zacks #2 Rank
that translates into a short-term ‘Buy’ recommendation.
APOLLO GROUP (APOL): Free Stock Analysis Report
STRAYER EDUC (STRA): Free Stock Analysis Report
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