DeVry, Capella Education Beat Expectations

NEW YORK ( TheStreet) -- DeVry ( DV) and Capella Education ( CPLA) topped quarterly profit expectations despite softer student enrollment.

DeVry shares rose 2.2% to close at $50.09 on Tuesday while Capella added 1% to $50.29.

DeVry, which runs Keller Graduate School of Management, Chamberlain College of Nursing, Ross University and the Carrington Colleges Group, said Tuesday it earned $92.9 million, or $1.32 per share, in the recent quarter, up 14.4% from a profit of $81.2 million, or $1.12 per share, in the year-earlier quarter.

Revenue jumped 11.6% to $562.7 million, from $504.4 million, helped by an increase in total student enrollment.

Top- and bottom-line results topped analysts' expectations for DeVry to earn $86.9 million, or $1.23 per share, on revenue of $563.8 million.

While DeVry's total student roster grew, new undergraduate enrollment at its namesake university dropped 15.4%; at its Ross University, new student enrollment fell 8.2%.

For Capella Education, new student enrollment plummeted 35.8%, and it forecast new student starts would be down 40% in the fiscal second quarter as the impact of increased competition and recent measures instituted to remain in compliance with new Department of Education regulations pressure enrollment standards.

Capella earned an adjusted 97 cents per share last quarter, up from 83 cents per share earned a year earlier.

Revenue increased 10.1% to $111.4 million, from $101.2 million.

Capella said it increased marketing and promotion spending by 18% to $35.3 million as it works to retain its working-adult student base, students deemed more likely to be able to pay back federal loans.

Federal student aid is among the primary sources of income for for-profit education providers.

Capella said tuition fee increases for the 2011-12 academic year would not be as severe as its previous tuition hikes, and the school said it would provide scholarships and grants in order to draw in more students.

Larger rival Apollo Group ( APOL), operator of University of Phoenix, said in March that its new student starts dropped by 45%, and the school operator forecast declines in 2011 and 2012 revenue.

Even so, Apollo Group topped adjusted quarterly profit expectations , though it offered a soft student enrollment outlook for the University of Phoenix.

Stocks in the education sector underperformed the S&P 500 last year for the second consecutive year. Performance in 2011 is expected to remain volatile amid regulatory uncertainty .

Similar to Apollo, for-profit education peer Corinthian Colleges ( COCO) also recently warned of a larger-than-previously forecast decline in new student enrollment.

Corinthian attributed its revised guidance to recently instituted tuition price increases for diploma programs, which went into effect on Feb. 1.

Uncertainty has plagued the for-profit education sector since last summer.

The Department of Education is expected to unveil a final version of what is known as the "gainful employment" rule , which would cut federal aid to schools with more than 65% of students unable to repay hefty loans. Federal aid to for-profit education providers came to nearly $150 billion in the last academic year.

RBC Capital Markets analyst Robert C. Wetenhall said he expects the final version "will be comparable to or less onerous than the previously published draft version." Still, he told TheStreet recently that it's "tough to get excited about the education sector's outlook" for 2011 given the lack of a hard catalyst, or "something dramatically material likely to provide torque to the stocks."

The Obama administration's proposed education regulations cover everything from restricting incentive-based recruiting practices, the need for new job-training courses, and taking action against schools which fail to advertise honestly to requiring schools to notify students of graduation and job placement rates . Institutions would also be required to limit student enrollment to those who have high school diplomas or can readily demonstrate their readiness for university-level education. Schools must also comply with what is called the 90:10 rule in fiscal 2012, a rule stipulating that no more than 90% of a for-profit education provider's revenue may be generated from the DOE's federal student aid program.

Bob Phillips, managing partner at Spectrum Management Group, told TheStreet "the general macro outlook for the sector is not good." He views the education sector as "a bubble fueled by free government money."

School stock peer Bridgepoint Education ( BPI) beat fourth-quarter profit expectations and said it expects student enrollment to grow nearly 6% this year despite all the new regulations.

Bridgepoint said the impact of regulatory changes scheduled to take effect during the year as well as internal quality initiatives it introduced in 2010 will pressure the postsecondary education provider, particularly in the second half of 2011, yet it expects positive full-year new enrollment growth.

Earlier this year, Capella said it planned to reduce its non-faculty workforce by around 8%, or 125 positions, resulting in a charge of about $2 million in the quarter ending March 31, 2011 and an annualized cost savings of approximately $12 to $12.5 million.

Capella's layoffs and new student enrollment forecast echoed that of Corinthian Colleges ( COCO), which recently beat top- and bottom-line expectations for its 2011 fiscal second quarter, but forecast slower student enrollment growth and said it plans to raise tuition fees and trim its workforce.

-- Written by Miriam Marcus Reimer in New York.

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