The waning economy combined with stringent regulatory
environment and falling enrollments are making life tougher for
education companies, and Capella Education Company
(CPLA) is no exception. The for-profit education institutions are
now restraining from aggressive admission practices amid issues of
rising default rates of student loans.
Capella recently reported fourth-quarter 2011 results, and in
the following paragraphs we will discuss the recent earnings
announcement, subsequent estimate revisions by analysts, as well as
the Zacks Rank and long-term recommendation for the stock.
Last Quarter Synopsis
Capella reported its fourth quarter financial results on
February 14, 2012. The quarterly earnings of 91 cents a share
dropped 16.5% from $1.09 earned in the prior-year quarter, dragged
by a fall in students’ enrollment. On a reported basis, including
one-time items, earnings came in at 85 cents, down 22% from the
year-ago quarter. The Zacks Consensus Estimate for the quarter was
91 cents.
The quarterly revenue of $110 million came in line with the
Zacks Consensus Estimate, but fell 4.1% from $114.7 million in the
year-ago quarter. The decline in the top line dovetails with
management’s guidance range of 3% to 4.5% fall.
(Read our full coverage on this earnings report: Lower
Enrollment Hurts Capella)
Agreement of Estimate Revisions
The agreement of estimate revisions indicates that majority of
the analysts were unidirectional following Capella’s fourth-quarter
2011 results.
In the last 7 days, 8 out of 13 analysts covering the stock
lowered their estimates, whereas only 1 analyst raised for the
first quarter of 2012. For the second quarter, 7 analysts revised
their estimates downwards and only 2 analysts made an upward
revision.
For fiscal 2012, 6 analysts revised their estimates downwards,
while 4 analysts moved in the opposite direction in the last 7
days. As for 2013, 3 analysts made a downward revision to their
estimates, while only 1 analyst upped its estimate.
What Drives Estimates Revision
Clearly, a negative sentiment is palpable among most of the
analysts, who remain pessimistic on Capella’s performance.
Following the earnings release, the Zacks Consensus Estimate has
been depicting a downfall with majority of the analysts remaining
bearish on the stock.
Capella’s fourth quarter results failed to impress the analysts,
who still foresee a downward pressure on the stock in the near
future, as the company continues to grapple against falling
enrollments. Total active enrollment dropped 4.5% in the fourth
quarter, following a decline of 7.5% in third quarter of 2011.
Capella now projects total enrollment to decline between 5% and 6%
in the first quarter of 2012.
The potential risk looming over the education sector is the
regulation proposed by the Department of Education. This regulation
weighs 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.
However, Capella’s indication that new enrollment in the first
quarter of 2012 is expected to decline marginally, following a drop
of 9.4% in the fourth quarter and a sharp fall of 36% in the first
quarter of 2011, gave some respite to the dwindling hopes of the
analysts. The company 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. To counter sluggishness in students’ enrollment, the
company has been restructuring its cost base, diversifying its
portfolio, and focusing on introducing new products offerings and
new program accreditations. The initiatives undertaken were able to
win the heart of some of the analysts, who went to revise their
estimates upwards.
Magnitude of Estimate Revisions
The magnitude of estimate revisions by the analysts is clearly
reflected through changes in the Zacks Consensus
Estimates.
The Zacks Consensus Estimates for both the first and second
quarters of 2012 dropped 6 cents and 7 cents to 79 cents and 78
cents, respectively, in the last 7 days.
For fiscal 2012 and 2013, the Zacks Consensus Estimates fell 10
cents and 11 cents to $3.12 and $3.46, respectively, in the last 7
days.
Closing Comment
Currently, we have a 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 that translates into a short-term
Hold recommendation, which well defines the risk-reward ratio that
remains balanced for the stock.
Capella has undertaken diversification strategy as evident from
the acquisitions of Sophia, a social teaching and learning platform
and Resource Development International, an online provider of UK
University qualifications by distance learning; and expansion of
educational programs.
About the Zacks Rank
As a PhD from MIT, Len Zacks proved over 30 years ago that
earnings estimate revisions are the most powerful force impacting
stock prices. He turned this ground breaking discovery into two of
the most celebrating stock rating systems in use today. The Zacks
Rank for stock trading in a 1 to 3 month time horizon and the Zacks
Recommendation for long-term investing (6+ months). These “Earnings
Estimate Scorecard” articles help analyze the important aspects of
estimate revisions for each stock after their quarterly earnings
announcements. Learn more about earnings estimates and our proven
stock ratings at http://www.zacks.com/education
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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