Capella Education Company (CPLA), the provider of online education, recently 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 posted in the prior-year quarter. The Zacks Consensus Estimate was stable prior to the earnings announcement.
Behind the Headline
Total enrollment soared 25.7% year over year to 38,634. Graduate program enrollment rose 19.4% to approximately 30,000. Due to the surge 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.
Capella now expects revenue to increase in the range of 20% to 22% in the fourth quarter, and reiterated growth between 26.5% and 28.5% for fiscal 2010.
Despite a rise of 21.7% in total costs and expenses, operating income for the quarter surged 44.4% to $21 million helped by double-digit growth in the top line, whereas the operating margin expanded 260 basis points to 20%. Capella now expects operating margin in the range of 24.5% to 25.5% for the fourth quarter, and between 21.5% and 22.5% for fiscal 2010.
Slowing Enrollment Growth
We observe that the growth in enrollments in the quarter under review has decelerated sequentially. After increasing 32.1% in the second quarter, the rate of growth in enrollment dropped by 640 basis points in the quarter. Management also warned of lower student enrollments amid stringent admissions criteria, which requires students to undergo an assessment process to get enrolled.
Following this, a negative sentiment may be palpable among the analysts covering the stock, and we could witness a fall in the Zacks Consensus Estimate in the coming days.
Capella now expects enrollment to rise in the range of 16% to 17% in fourth-quarter 2010, reflecting a slower growth compared with previous quarters. For fiscal 2010, the company continues to expect enrollment growth between 26.5% and 28.5%.
The current potential risk looming over the education sector is the regulation proposed by the Department of Education that may weigh upon students’ enrollments and the company’s profits. Recently, the Department of Education proposed that an educational program could only qualify for Title IV funds, if it helps in achieving gainful employment. The company derives a major portion of its revenues from federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.
The sector bellwether Apollo Group Inc. (APOL) also cautioned that enrollment in its first-quarter 2011 would drop by more than 40%, and withdrew its outlook for the fiscal year, citing an uncertain regulatory environment.
Other Financial Details
Capella ended third-quarter 2010 with cash and cash equivalents of $79.1 million, shareholders’ equity of $203 million and no debt. Cash flow from operations for the nine-month period surged 6.9% to $52.8 million.
During the quarter, Capella bought back approximately 300,000 shares aggregating $21.1 million. The company still has nearly $61.2 million at its disposal under its current share repurchase authorization as of September 30, 2010.
Currently, we are ‘Neutral’ on the stock. Capella holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation.
CAPELLA EDUCATN (CPLA): Free Stock Analysis Report
Zacks Investment Research
