Earnings Preview: Capella Eduction

Feb.11.11 | About: Capella Education (CPLA)

Capella Education Company (NASDAQ:CPLA), the provider of online education, is scheduled to report its fourth-quarter 2010 financial results on February 15, 2011. The current Zacks Consensus Estimate for the quarter is $1.11 per share. For the quarter under review, revenue is $115 million, according to the Zacks Consensus Estimate.

Third-Quarter 2010, a Synopsis

Capella delivered better-than-expected third-quarter 2010 results buoyed by a rise in enrollment. The quarterly earnings of 80 cents a share, beat the Zacks Consensus Estimate of 78 cents, and grew 40.4% from 57 cents in the prior-year quarter.

Total enrollment soared 25.7% year-over-year to 38,634. Graduate program enrollment rose 19.4% to approximately 30,000. Due to the increase in enrollment, the quarterly revenue of $105 million surged 25.7% compared with the prior-year quarter, which remained in line with the Zacks Consensus Estimate.

Management Guided

Capella at its last earnings release guided toward revenue growth between 20% and 22% in the fourth quarter of 2010, and reiterated an increase of 26.5% to 28.5% for fiscal 2010.

Management expects enrollment to rise in the range of 16% to 17% in the fourth quarter, reflecting slower growth compared with previous quarters. However, for fiscal 2010, Capella continues to expect enrollment growth between 26.5% and 28.5%.

Fourth-Quarter 2010 Zacks Consensus

Analysts considered by Zacks, expect Capella to post fourth-quarter 2010 earnings of $1.11 per share. The current Zacks Consensus Estimate reflects a growth of 26.1% from the prior-year quarter earnings. The current Zacks Consensus Estimate for the quarter ranges between $1.06 and $1.19.

Zacks Agreement & Magnitude

Of the 18 analysts following the stock, none of the analysts has revised estimates in the last 7 or 30 days, leaving the Zacks Consensus Estimate unchanged.

Positive Earnings Surprise History

With respect to earnings surprises, Capella has topped the Zacks Consensus Estimate over the last four quarters in the range of 2.6% to 14.1%. The average remained at 7.3%. This suggests that Capella has beaten the Zacks Consensus Estimate by an average of 7.3% in the last four quarters. Given the past performance we expect the company to outperform the Zacks Consensus Estimate.

Capella in Neutral Lane

Capella’s strong focus on working adults and exclusive online education has enabled it to become a prominent player in the for-profit post-secondary education industry. The company’s sustained effort to expand educational programs helps it to boost enrollments, and in turn, the top line.

However, the regulations proposed by the Department of Education may weigh upon student enrollment and the company’s profits. A slowdown in student enrollment was witnessed in the third quarter, which led the company to forecast a 16% to 17% rise in the fourth quarter as against a 25.7% growth registered in the third quarter.

We observe that the growth in enrollments in third-quarter 2010 decelerated sequentially. After increasing 32.1% in the second quarter, the rate of growth in enrollment dropped to 25.7% in the third quarter. Management also warned of lower student enrollments amid stringent admissions criteria, which requires students to undergo an assessment process to get enrolled.

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 the use of student’s grant.

Given the pros and cons, we prefer to have a long-term 'Neutral' rating on the stock. Capella Education, which competes with Apollo Group Inc. (NASDAQ:APOL) and Strayer Education Inc. (NASDAQ:STRA), holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation, and correlates with our long-term view.