Capella Upgraded to Neutral

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We recently upgraded our recommendation on Capella Education Company (CPLA) from Underperform to Neutral following the better-than-expected second quarter results.

The second quarter 2012 results were better than Zacks as well as management expectations. Capella’s second quarter earnings of 85 cents, though down from the prior-quarter levels, were significantly above the Zacks Consensus Estimate of 64 cents. Better-than-expected revenues boosted the quarter’s earnings. Quarterly revenues also exceeded the Zacks Consensus Estimate and slipped marginally by 0.2% from the year-ago levels.  Revenues benefited from the lower-than-expected decline in new enrollment and improved persistence rates. The revenue and enrollment declines were sufficiently narrower than management’s expectations due to Capella’s marketing efforts. In fact, Capella expects new enrollment growth for the third quarter of 2012 to remain flat or enjoy a marginal rise.

Overall, Capella University’s programs offer a high-quality educational experience and it drives strong outcomes. Capella also continuously invests in introducing new programs and specialization development to provide various courses and improve student outcomes. Continuous innovation and updating the current courses will boost enrollments and drive the long-term growth.

In order to improve overall enrollment growth and increase efficiencies, Capella is also working to build brand awareness for its university through mass media, social media and strategic relationships with employers.

Further, the company has undertaken several initiatives to improve student success rates. For example, the company has refined its marketing strategy to attract students who are more likely to carry on with the course. It is also creating innovative learning technologies, which will meet the needs of working adults. Additionally, the company has provided analytic tools to its faculty and advisors to help them identify, track, and intervene when a student is at risk of failing a course.

As a result of these initiatives, the company witnessed an improvement in overall persistence rates in the first half of 2012. Though these learner success initiatives and the brand-driven marketing strategy will hurt revenues, earnings and cash flow in the near term by increasing expenses, they bode well for the company’s long-term growth by improving learner success and lifetime revenue.

All these catalysts give us greater confidence in the company’s future growth prospects despite the current tough regulatory and economic environment. We therefore upgrade our rating on the stock from Underperform to Neutral.

Read the Full Research Report on CPLA

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