We have downgraded our rating on
Capella Education Company
) from Neutral to Underperform on a weak outlook for the year.
Capella's first-quarter 2012 earnings of 82 cents per share were
down approximately 15% from adjusted earnings of 97 cents per share
in the first quarter of 2011 due to top-line and margin decline.
However, the first quarter earnings surpassed the Zacks Consensus
Estimate of 78 cents. Quarterly revenues of $109.4 million fell
1.8% from $111.4 million in the year-ago quarter due to a decline
in new enrollment. However, revenues exceeded the Zacks Consensus
Estimate of $105.0 million.
The company has been witnessing volatile enrollment growth since
the last few quarters. In 2011, and in the first quarter of 2012,
the company witnessed declining new enrollment growth which in turn
hurt total enrollments, revenues, cash flows and profitability.
Enrollment growth was affected by tough overall market
In order to improve overall enrollment growth, the company is
moving away from a direct marketing aggregator channel to a
brand-driven marketing strategy to build greater awareness and
preference for Capella. However, these initiatives have not
significantly improved enrollments yet and management does not
expect to see any positive enrollment growth for the rest of 2012.
This strategy is hurting margins due to increased marketing and
In the second quarter too, the company is expecting a 1%-2%
year-on-year decline in revenues due to an expected total
enrollment decline between 6% and 7% and new enrollment decline in
the high single digits. Operating margins are also expected to be
down from the prior-year level. In fact, the company does not
expect to see positive enrollment growth in any quarter of 2012 and
believes achieving its operating goal of at least 15% annual
operating margins is challenging in 2012. The weak outlook is the
principal reason behind the downgrade.
Moreover, the highly regulated nature of postsecondary education
in the US also remains a consistent overhang. The regulations and
policies of the Department of Education, state education agencies,
and the accrediting agencies change frequently. Changing regulatory
requirements are taking a beating on enrollment growth for most
education companies like
ITT Educational Services Inc.
Apollo Group Inc. (
Universal Technical Institute Inc.
) and many more.
Capella derives a significant portion of its revenues from
federal student financial aid programs, referred to as Title IV
programs, which are administered by the Department of Education. A
significant percentage of the company's students rely on the Title
IV program funds to meet the cost of their education.
Educational institutions are increasingly under the scanner due
to the rise in abuse of Title IV funds. 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. Educational institutions are now being asked
to submit information relating to recruitment procedures and the
use of student grants.
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