For-Profit Education Stocks: Winners & Losers of 2010

Capella Education

Capella Education (CPLA)

Year-to-Date Share Price Percentage Loss: -17.94%

Market Capitalization: $1.03 Billion

For its most recently reported quarter, Capella Education booked an increase in profits and revenue. For the first nine months of the year revenue grew 29.7% to $311.4 million. Year-to-date net income surged 56% to $43.2 million, or $2.55 per share.

Even so, the uncertainty surrounding proposed regulatory changes for the for-profit sector led Capella to warn of slowing enrollment growth, cautioning that "new enrollment is anticipated to be slightly down from fourth quarter 2009, due to an increasingly challenging external market environment." Revenue was also expected to slow, the company said in its third-quarter earnings release.

The online postsecondary education services company also said it would tighten enrollment practices for its bachelor program. CEO Kevin Gilligan said undergraduate students who had not attended any prior higher-education school would have to go through an assessment processes before being allowed to enroll. Undergrads make up about 20% of Capella's total student roster.

"Everybody is going through the same issues," said Sterne Agee' Bhatia at the time. "They are all finding it harder to get higher quality students." Bhatia, who had a neutral rating on Capella shares, added that, "this is not a one-quarter trend either. This is going to continue for the next 3-4 quarters."

Capella forecast current-quarter student enrollment growth in a range between 16% and 17%, from third-quarter growth of 25.7%. Revenue is expected to grow as much as 22%, after increasing 26% in the prior quarter.

Analysts from Zacks Investment Research upgraded their rating on Capella Education to neutral, from underperform, with a price target of $69.

"Capella Education's strong focus on working adults and exclusive online education has enabled it to become a prominent player in the for-profit post-secondary education industry. The company's sustained efforts to expand educational programs helps it to boost enrollments, and in turn, the top line," Zacks wrote, pointing out the CPLA's total enrollment soared 25.7% year-over-year, boosting quarterly revenue by strong double digit percentages.

Still enrollment in the third quarter decelerated sequentially and is expected to fall further in current quarter "reflecting a soft increase compared with previous quarters."

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