Capella Education Company: Earnings Preview

| About: Capella Education (CPLA)

Capella Education Company (NASDAQ:CPLA), a provider of online education, is scheduled to report its second-quarter 2011 financial results on Tuesday, July 26, 2011. The current Zacks Consensus Estimate for the quarter is 90 cents a share. The Zacks Consensus estimates revenue at $107 million for the second quarter.

First-Quarter 2011, a Synopsis

On April 26, 2011, Capella delivered first-quarter 2011 results. The quarterly earnings of 97 cents a share beat the Zacks Consensus Estimate of 82 cents, and grew 9% from 89 cents earned in the prior-year quarter. Management hinted that the growth in enrollment and revenue were marginally above expectations and lent support to the bottom line.

The quarterly revenue of $111.4 million jumped 10% from the prior-year quarter, and remained in line with the Zacks Consensus Estimate. The increase in the top line was slightly above management’s previous expectation of 8.5–9.5% growth.

Second-Quarter 2011 Consensus

The analysts surveyed by Zacks, expect Capella to post second-quarter 2011 earnings of 90 cents a share. The current Zacks Consensus Estimate compares with 86 cents a share earned in the year-ago quarter. The estimates in the current Zacks Consensus for the quarter range from a low of 84 cents to a high of 95 cents.

Zacks Agreement & Magnitude

Of the 15 analysts following the stock, none revised their estimates upward or downward in the last 30 or 7 days, thereby keeping the Zacks Consensus Estimate unchanged.

Mixed Earnings Surprise History

With respect to earnings surprises, Capella has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 1.8% to positive 18.3%. The average remained at positive 7.0%. This suggests that Capella has beaten the Zacks Consensus Estimate by an average of 7.0% in the trailing four quarters.

Risk Reward Balance Capella

Capella’s strong focus on working adults and exclusive online education has enabled it to establish a healthy position in the for-profit post-secondary education industry.

Total active enrollment for first-quarter 2011 climbed 7.3% to 39,904 from the year-ago quarter, and bettered the 4.5–6.5% guidance range provided earlier. However, the growth in enrollments in the first quarter decelerated sequentially.

After increasing 16.2% in fourth-quarter 2010, the rate of growth in enrollment dropped sharply to 7.3% in first-quarter 2011. Capella now expects total enrollment to fall by 1% to 3% in second-quarter 2011. Further, revenue is expected to remain flat or climb 2% in the quarter.

The risk facing the education sector is the regulation proposed by the Department of Education that is weighing upon students’ enrollments and the company’s profits. 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.

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.

Capella cautioned that new enrollment in second-quarter 2011 is expected to tumble approximately 40%. Management hinted that other for-profit education institutes facing tougher norms are chasing Capella's students who are financially sound and have a better loan repayment track record.

The company generally focuses on working adults, and in order to draw students it is also ramping up its marketing and promotional expenditures.

To counter sluggishness in students’ enrollment, education companies are also resorting to restructuring their cost base. Capella said that it has lowered its headcount by about 120 non-faculty members and incurred a charge of about $1.9 million for the purpose in the quarter. Management is hopeful that the eliminations will result in cost savings of approximately $12 to $12.5 million per year.

Recently, Capella announced the buyout of Resource Development International Ltd. (“RDI”), an autonomous distance learning provider of U.K., for $14.9 million. The all-cash deal will enable Capella to gain a foothold in the lucrative international market as RDI has a strong presence in the international higher education market.

Given the pros and cons we have a long-term ‘Neutral’ recommendation on the stock. Moreover, Capella, 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’ rating.