After announcing soft fourth-quarter 2010 results, Capella Education Company (CPLA) is set to boost investors’ confidence on the stock by deploying its free cash toward escalating its present share buyback program.
The newly announced program marks an increase of $65.0 million and authorizes the company to buyback up to $113.0 million shares through open market or private transactions. The company may customize or conclude the new program anytime with no prior notice.
Capella might also buyback shares through 10b5-1 plan, which permits it to acquire shares even on corporate dim-out period.
Capella had about $48.0 million left at its disposal under its preceding share repurchase program, as of December 31, 2010. During fourth-quarter 2010, the company repurchased 242,000 shares, aggregating $13.0 million.
The company due to sluggish demand, sturdy challenge from Strayer Education Inc. (STRA) and Apollo Group Inc. (APOL) coupled with stringent entrance criteria for students, is experiencing a sharp decline in new enrollment numbers.
The growth in enrollments decelerated sequentially in the fourth quarter of 2010. After increasing 25.7% in the third quarter, the rate of growth in enrollment plunged 16.2% in the fourth quarter. The company expects total enrollment to rise in the range of 4.5% to 6.5% in the first quarter of 2011, reflecting a slower growth compared with the previous quarters.
The current latent risk looming over 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 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.
Management hinted that other for-profit education institutes facing tougher norms are interested in Capella’s students, who are financially sound and have better loan repayment rates as the company focuses on working adults.
To offset the sluggishness in student’s enrollment, the companies are restructuring their cost base. Capella intends to lower its headcount by about 125, representing approximately 8.0% of its non-faculty workforce by incurring a charge of about $2.0 million in the first quarter of 2011. However, management hinted that the eliminations will result in cost savings of approximately $12.0 to $12.5 million per year.
Currently, we maintain a long-term ‘Neutral’ recommendation on the stock. Moreover, Capella holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.
APOLLO GROUP (APOL): Free Stock Analysis Report
CAPELLA EDUCATN (CPLA): Free Stock Analysis Report
STRAYER EDUC (STRA): Free Stock Analysis Report
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