Capella Education: Potential Returns Outweigh the Risks

Jul.20.07 | About: Capella Education (CPLA)

It has long been understood that if you want to increase the amount of money you make, you need to either increase the amount of time you work, or increase your skill set. For employees who wish to take the latter alternative, Capella Education (NASDAQ:CPLA) often offers the solution.

Capella is the only publicly traded company that offers exclusively online courses and degrees. While it competes with the likes of Apollo Group (NASDAQ:APOL), Strayer Education (NASDAQ:STRA), and Career Education (NASDAQ:CECO); it’s primary competition is non-profit schools such as state university systems. As more public universities offer certain classes online, Capella is finding the playing field more crowded.

One of the ways CPLA differentiates itself is by catering more towards the graduate student. While there is definitely more demand in the undergraduate area, many competitors are servicing this area. Graduate students, however offer opportunity because most graduate students have more motivated and persistent - more likely to follow the program from beginning through completion. Also the margins are better for graduate students as the classes are more highly specialized and usually have greater pricing power.

In the past there has been a bit of a negative stigma attached to online courses and schools that offer entire programs online. However, that seems to be fading a bit as recent surveys of executives and hiring managers show that many online programs are now considered to be just as beneficial as a traditional degree from a more recognized school. Capella is accredited by NCA, a regional body, as well as by many state education boards.

While enrollment continues to drive top line growth, the company should get an even bigger boost from margin expansion. In 2006, the company enjoyed a 9.9% margin which is expected to increase to 11-12% this year. Analysts expect to see this in the high teens in the next 3-5 years which has significant effects on potential earnings. The company has been plowing a good bit of money into a new Enterprise Resource Planning [ERP] system that should be complete at the end of this year. Simply dropping the capital expense from this project will add a boost to profitability. Also, most of the company’s costs are fixed so additional enrollment should filter through efficiently to the bottom line.

Capella is likely to extend its offering suite by adding additional degrees available to students. They have announced new programs within the public safety and psychology disciplines. Business, Education, and Health & Human Services make up the majority of programs and these areas enjoy the fastest growing employment numbers. Since many of the referrals the company receives are from the military and corporate sponsors, they appear to be placed in the right areas to drive enrollment growth.

One potentially negative item includes allegations by the New York attorney general’s office that the company may have accepted kickbacks from one of the student lenders it recommends. While this results in negative publicity for the company, the actual dollar amount of potential fraud seems very limited and will not likely result in a material penalty for the company. At this point I believe the potential returns outweigh the risks in the stock and I would like to find an attractive spot to become involved.

CPLA 8-mo chart

CPLA 8-mo chart

Disclosure: Author does not have a position in CPLA