Capella Education Company (CPLA), one of the largest rent-to-own operators, recently delivered better-than-expected third-quarter 2011 results.
Street analysts had nearly a week to ponder on the news. In the subsequent paragraphs, we will cover the recent earnings announcement, analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.
Earnings Report Review
Capella’s quarterly earnings of 66 cents a share beat the Zacks Consensus Estimate of 59 cents, but dropped 17.5% from 80 cents earned in the prior-year quarter.
The quarterly revenue of $102.3 million came ahead of the Zacks Consensus Estimate of $101 million but fell 2.6% from the year-ago quarter.
(Read our full coverage on this earnings report: Capella Beats Estimate)
Agreement of Estimate Revisions
Following the earnings release, a mixed sentiment is evident among analysts. In the last 7 days, 2 out of the 14 analysts covering the stock increased their estimates while 7 lowered the same for fourth-quarter 2011. For first-quarter 2012, 2 analysts revised the estimate in the upward direction, while 1 chopped the estimate in the last 7 days.
For fiscal 2011, 6 analysts have increased their estimates in the last 7 days, while 4 lowered the projection. For fiscal 2012, 7 analysts revised their estimate in the upward direction, while 5 lowered the same.
Magnitude of Estimate Revisions
In the last 7 days, the Zacks Consensus Estimate came down by 2 cents to 91 cents for the fourth quarter of fiscal 2011, while it increased from 6 cents to 82 cents for first-quarter 2012.
For fiscal 2011, the Zacks Consensus Estimate remained stagnant at $3.50, while it increased by 6 cents to $3.16 for FY12, in the last 7 days.
The current Zacks Consensus for fourth-quarter 2011 is pegged from a low of 86 cents to a high of 94 cents. For fiscal 2011, the estimates range from $3.30 to $3.56.
Factors Driving Estimates
Capella is witnessing a fall in enrollments. After falling 1.5% in second-quarter 2011, total active enrollment dropped 7.5% in the third quarter.
However, Capella now expects total enrollment to decline at a softer rate between 4% and 6% in the fourth quarter. The company also cautioned that new enrollment in the quarter is expected to tumble but at a lower rate of approximately 10%, following a sharp decline of 36% in the third quarter.
Moreover, the Department of Education had proposed that an educational program could only qualify for Title IV funds, if it helps in achieving gainful employment, including the criteria of loan repayment rate and debt-to-income ratios. The institutions are under 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 the use of student’s grant.
However, Capella Education’s strong focus toward working adults and exclusive online education has enabled it to establish a healthy position in the for-profit post-secondary education industry. Moreover, the company’s sustained effort to expand educational programs helps it to boost enrollments. These initiatives provide a strong upside to the company’s future top-line potential.
Moreover, higher education sees a countercyclical movement during sluggish economic conditions. Postsecondary enrollments tend to rise as both unemployed and employed workers return to school to reskill themselves and existing students remain in school for a longer duration compelled by the intensely competitive job market.
Currently, we have a long-term Outperform rating on the stock. Moreover, Capella, which competes with Apollo Group Inc. (APOL) and Strayer Education Inc. (STRA), holds a Zacks #3 Rank that translates into a short-term Hold recommendation.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
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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