On Nov 18, we reverted our recommendation on
Capella Education Company
) to Neutral from Outperform due to management's cautious
Rationale Behind the Downgrade
Capella reported decent results in third-quarter fiscal 2013.
Earnings beat both the Zacks Consensus Estimate and year-ago
results by 20.0% and 23.1%, respectively, backed by higher
operating margins, lower debt expenses and disciplined cost
Revenues went up 1.4% from the year-ago results and beat the
Zacks Consensus Estimate by 0.7%. Revenue also surpassed
management's expectations backed by tuition increase.
Overall, we are encouraged by Capella's relationship and
brand-driven marketing strategy and initiatives to improve
learner success rates have begun to bear fruitful results.
However, Capella has been witnessing declining enrollment
trends for the past few quarters due to volatility in the
educational sector. Moreover, tough global market conditions have
resulted in hesitancy among students over taking a loan which,
coupled with the uncertain job scenario, has decreased students'
starts in the higher educational institutions.
Though student starts showed improvement for the first half of
fiscal 2013, it again dampened during the third quarter. The
ongoing downward trend in enrollment has prompted Capella
management to give a cautious outlook for the upcoming
fourth-quarter fiscal 2013 as it feels the conditions are not
going to improve until 2014.
The company expects both new and total enrollments to decline
in a mid-to-high single-digit percentage range. We revert back to
Neutral recommendation as keeping in view the pessimistic outlook
of management for the upcoming quarter.
Other Stocks to Consider
Capella carries a Zacks Rank #3 (Hold). Some better-ranked
stocks in the education sector include
ITT Educational Services Inc.
New Oriental Education & Technology Group
Xueda Education Group
). While ITT Educational and New Oriental carry a Zacks Rank #1
(Strong Buy), Xueda holds a Zacks Rank #2 (Buy).
CAPELLA EDUCATN (CPLA): Free Stock Analysis
NEW ORIENTAL ED (EDU): Free Stock Analysis
ITT EDUCATIONAL (ESI): Free Stock Analysis
XUEDA EDUC-ADR (XUE): Free Stock Analysis
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