APOL Apollo Education Grp., Inc.

We maintain our long-term Neutral recommendation on Capella Education Company (CPLA), aprovider 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 Education had delivered better-than-expected second-quarter 2011 results. The quarterly earnings of 99 cents a share beat the Zacks Consensus Estimate of 90 cents, and grew 15.1% from 86 cents in the prior-year quarter.

The quarterly revenue of $106.4 million rose 1.2% from the prior-year quarter but fell marginally 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.

However, 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. Further, revenue is expected to fall by 2.5% to 4% in third-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.

New enrollment plunged 41.6% during the quarter, reflecting tough market conditions, changes with respect to program accreditation, and stringent admissions criteria. 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 Capella's students who are financially sound and have better loan repayment track records. 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.

Given the pros and cons we prefer to be Neutral 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