Capella Education Company (CPLA) was founded in 1991 in Minnesota as an education institution targeting working adults. By 1993 the company was offering doctoral and master’s degrees through distance learning programs, and by 1995 CPLA had begun offering their courses through the internet. From 1998 through to today, CPLA expanded their offerings significantly to the point where they now offer 43 academic programs with 136 specializations. In 2006 the company listed on the NASDAQ.
CPLA serves around 39,000 students targeting primarily working adults. 80% of CPLA’s students are enrolled in a masters or doctoral degree program, and all courses are offered online.
CPLA’s financial performance to date has been excellent, which has resulted in a USAStockValuation.com quality rating of 86/100 which is excellent.
IV as calculated by the USAStockValuation.com system is $56.38 but is forecast to go sideways over the next few years while the macro environment is weak. CPLA need to prove to investors that they can ride out the challenging macro environment for the next year or 2 and still maintain good net income and cashflows so that they are in good position to capitalize once the macro climate picks up.
Investment Grade Table
CPLA takes position number 41 this week on the USAStockValuation.com weekly Top 50 Investment Grade Table for the week ending 5th of Nov 2011.
If, in the future, CPLA cannot find opportunities to invest retained earnings at high rates of return, the company may begin to pay a dividend. Indeed if they cannot reinvest their cash for meaningful growth, they should adopt a dividend policy. Let’s look at 2 dividend scenarios:
For these 2 scenarios, let’s assume that the net income of $61M they achieved in 2010 can be expected long term. The forecasts for 2011 and 2012 are below this, but once the macro-economic climate picks up CPLA will likely return to their 2010 performance levels.
Scenario 1: If the company employs a payout ratio of 50%: Intrinsic Value will drop to $41.55 (to understand why IV would drop as a result of introducing a dividend, see our articles: here, and here), and the yield based on the current shareprice of $34.30 would be 5.2%.
Scenario 2: If the company employs a payout ratio of 75%, Intrinsic Value will drop to $34.87, and the dividend yield based on a shareprice of $34.30 would be 7.8%.
For 2010, around 78% of the revenues of CPLA were derived from federal student financial aid programs, hence the company keeps a close eye on all regulatory developments. The remainder came from individual resources and corporate funding.
There is a wide range of criteria that a for-profit education institution such as CPLA need to adhere to in order to access federal funding, and many of the requirements have been recently reviewed and modified by the Department of Education. Just a few of the many requirements are outlined below:
Cohort Rate (default rate) – an education institution must have no more than 25% of its students default on their student loans. CPLA’s cohort rate for 2009, based on data from the DoE, was 6.7%.
The 90/10 Rule – an institution cannot derive more than 90% of its revenues from federal student financial aid programs. For the year ended December 2010 CPLA derived 78% of its revenues from the federal government.
For both a Value and Growth play which we consider a better way to invest (for a number of reasons), an investor will need to be confident that CPLA can cash in on the future growth prospects derived from the increasing demand for online education. It certainly seems that CPLA are well positioned to do just that, and as such many investors will see good value in the current price levels.