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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