On Nov 18, we reverted our recommendation on Capella Education Company (CPLA) to Neutral from Outperform due to management’s cautious fourth-quarter guidance.
Rationale Behind the Downgrade
Capella reported decent results in third-quarter fiscal 2013. Earnings beat both the Zacks Consensus Estimate and year-ago results by 20.0% and 23.1%, respectively, backed by higher operating margins, lower debt expenses and disciplined cost management.
Revenues went up 1.4% from the year-ago results and beat the Zacks Consensus Estimate by 0.7%. Revenue also surpassed management’s expectations backed by tuition increase.
Overall, we are encouraged by Capella’s relationship and brand-driven marketing strategy and initiatives to improve learner success rates have begun to bear fruitful results.
However, Capella has been witnessing declining enrollment trends for the past few quarters due to volatility in the educational sector. Moreover, tough global market conditions have resulted in hesitancy among students over taking a loan which, coupled with the uncertain job scenario, has decreased students’ starts in the higher educational institutions.
Though student starts showed improvement for the first half of fiscal 2013, it again dampened during the third quarter. The ongoing downward trend in enrollment has prompted Capella management to give a cautious outlook for the upcoming fourth-quarter fiscal 2013 as it feels the conditions are not going to improve until 2014.
The company expects both new and total enrollments to decline in a mid-to-high single-digit percentage range. We revert back to Neutral recommendation as keeping in view the pessimistic outlook of management for the upcoming quarter.
Other Stocks to Consider
Capella carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the education sector include ITT Educational Services Inc. (ESI), New Oriental Education & Technology Group Inc. (EDU) and Xueda Education Group (XUE). While ITT Educational and New Oriental carry a Zacks Rank #1 (Strong Buy), Xueda holds a Zacks Rank #2 (Buy).