Capella Pushed Downward - Analyst Blog
December 29 2011 - 7:45AM
Zacks
The economy is in the doldrums,
showing no leniency for any sector. Since every industry is
directly or indirectly linked with the economy, troubles at one end
percolate down to the other and form a ripple effect until an
entire cycle is completed. It’s now time for the Education Industry
to bear the brunt.
People, either employed or
unemployed, pull their socks, pack their bags, and head toward
education institutions to enhance their skills in order to shield
themselves from money woes. But the recent recessionary fears have
reserved the situation and resulted in falling enrollments at
institutions. Capella Education Company (CPLA)
remains no exception.
Two of the obvious reasons for weak
enrollments are the turbulent economic scenario plagued by an
unemployment rate of 8.6% and a stringent regulatory environment.
This compelled our cautious stance on the stock for the time being.
Hence, we downgraded our long-term recommendation on Capella to
Neutral with a price target of $37.00. Earlier, we had an
Outperform rating.
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 company derives a major portion of its revenues from
Title IV programs. But like all education institutions, even
Capella is under the scanner due to high student-loan default
rates. The imposed regulations are weighing on student enrollments
and the company’s profits.
Capella’stotal active enrollment
dropped 7.5% during the third quarter of 2011. Management had
earlier guided enrollment to fall by 6% to 8% in the quarter. New
enrollment plunged 36%, reflecting tough market conditions, changes
with respect to program accreditation and stringent admission
criteria.
But this did not restrict Capella
from posting better-than-expected results in the third quarter of
2011. However, the performance remained muted when compared with
the prior-year quarter. The quarterly earnings of 66 cents a share
beat the Zacks Consensus Estimate of 59 cents, but dropped 17.5%
from the prior-year quarter.
Total revenue of $102.3 million
also came ahead of the Zacks Consensus Estimate of $101 million but
fell 2.6% from the year-ago quarter. The decline in the top line
dovetails with management’s guidance range of a 2.5% to 4% fall.
Capella now expects revenue to plunge by 3% to 4.5% in the fourth
quarter.
Amid economic upheavals and
dwindling prospects, Capella now expects total enrollment to
decline but at a softer rate between 4% and 6% in the fourth
quarter. Capella also hinted that new enrollment will also tumble
but at a lower rate of approximately 10%, following a sharp 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 third quarter. To counter a declining
student enrollment rate amid economic turbulence and regulatory
issues, the company is pushing hard to manage costs effectively,
improve marketing efficiencies and initiate new programs.
The above analysis supports our
Neutral stance on the stock. Moreover, 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, and clearly
defines how the investment merit balances with the current sector
headwinds.
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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