Capella Education Earnings Preview

| About: Capella Education (CPLA)

Capella Education Company (NASDAQ:CPLA), a provider of online education, is scheduled to report its third-quarter 2011 financial results on Tuesday, October 25, 2011. The current Zacks Consensus Estimate for the quarter is 60 cents a share. The Zacks Consensus estimates revenue at $101 million for the second quarter.

Second-Quarter 2011, a Synopsis

On July 26, 2011, Capella delivered better-than-expected second-quarter 2011 results. The quarterly earnings of 99 cents a share beat the Zacks Consensus Estimate of 90 cents, and grew 15.1% from 86 cents earned in the prior-year quarter.

The quarterly revenue of $106.4 million rose 1.2% from the prior-year quarter but fell marginally short of the Zacks Consensus Estimate of $107 million. The increase in the top line dovetails with management’s guidance range of flat to 2% growth. Capella now expects revenue to fall by 2.5% to 4% in third-quarter 2011.

Total active enrollment dropped 1.5% to 38,072 during the quarter. Management had earlier guided enrollment to fall by 1% to 3% in the quarter. New enrollment plunged 41.6% during the quarter, reflecting tough market conditions, changes with respect to program accreditation, and stringent admissions criteria.

Third-Quarter 2011 Consensus

The analysts surveyed by Zacks, expect Capella to post third-quarter 2011 earnings of 60 cents a share. The current Zacks Consensus Estimate compares with 80 cents a share earned in the year-ago quarter. The estimates in the current Zacks Consensus for the quarter range from a low of 57 cents to a high of 63 cents.

Zacks Agreement & Magnitude

Of the 14 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 7.3%. This suggests that Capella has beaten the Zacks Consensus Estimate by an average of 7.3% in the trailing four quarters.

Price Stats

Since its last earnings release on July 26, 2011, Capella’s market price has plunged 35.4% to $30.21 on October 21, 2011. During trading hours on October 21, the stock price reached the day low of $29.64 and the day high of $30.38.

The stock price is within the range of the 52-week low-high range of $26.12 attained on October 4, 2011 and $69.85 achieved on January 4, 2011. Over the period from July 26, 2011 to October 21, 2011, the stock dropped to a low of $26.12 on October 4, 2011 and rose to a high of $47.89 on July 26, 2011.

Let’s Conclude

We observe that Capella is witnessing a fall in enrollment. After increasing 7.3% in first-quarter 2011, total active enrollment slipped 1.5% in the second quarter. Capella now expects total enrollment to fall by 6% to 8% in third-quarter 2011.

The risk looming over the education sector is the regulation proposed by the Department of Education that is weighing upon students enrollment 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.

Capella cautioned that new enrollment in third-quarter 2011 is expected to tumble by approximately 30%. Management hinted that other for-profit education institutes facing tougher norms are chasing Capella's students who are financially sound and have better loan repayment rates.

The company generally focuses on working adults, and in order to draw students it is also ramping up its marketing and promotional expenditures, which rose 7.8% to $30.8 million during the second quarter. To counter sluggishness in students’ enrollment, education companies are also resorting to restructuring their cost base.

Currently, we maintain our 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 and correlates with our long-term view.