APOL Apollo Education Grp., Inc.

Capella Education Company (CPLA), the provider of online education, recently raised its existing share repurchase authorization by $50 million, reflecting its plan to utilize its free cash to enhance shareholders’ return.

The increase in the share buyback program was based on the $34.8 million that remained at its disposal at the end of the third quarter of 2011. During the quarter, Capella repurchased 694,000 shares, aggregating $25.2 million.

Management hinted that the company may purchase shares through the open market at existing market prices or private transactions by deploying the available reserves and cash generated from operating activities.The company can even customize or conclude the new program anytime with no prior notice. Capella might also buyback shares through the 10b5-1 plan, which permits it to acquire shares even in corporate dim-out periods.

Capella’s healthy balance sheet not only positions it to grab business opportunities and make potential investments, but simultaneously also helps it to fulfill its commitment of returning surplus cash to shareholders in the form of share buybacks. 

The company’s healthy liquidity position is evident from its cash, cash equivalent and marketable securities position of $138.5 million with no debt at the end of the third quarter. This offers financial flexibility to drive future growth.

Despite the step taken to boost investors’ confidence on the stock, Capella cannot escape from the grim reality of falling enrollments. After falling 1.5% in second-quarter 2011, total active enrollment dropped 7.5% in the third quarter. However, Capella now expects total enrollment to decline at a softer rate between 4% and 6% in the fourth quarter.

The 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 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 fourth-quarter 2011 is expected to tumble but at a lower rate of approximately 10%, following a sharp of decline of 36% in the third quarter, as it expects re-registration of existing apprentices to remain robust.

Capella generally focuses on working adults, and in order to draw students it is also ramping its marketing and promotional expenditures, which rose 13.8% to $33.7 million during the quarter. To counter sluggishness in students’ enrollment, education companies are also resorting to restructuring their cost base.

Currently, we have a long-term Outperform rating on the stock. However, Capella, which competes with Apollo Group Inc. (APOL) and Strayer Education Inc. (STRA), holds a Zacks #3 Rank that translates into a short-term Hold recommendation.

 
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