Earnings Scorecard: Capella - Analyst Blog


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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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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