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Capella Education: Enroll in the New Semester
Posted by: Mark Lin (IP Logged)
Date: November 14, 2012 10:14AM
Capella Education Co. (CPLA) is a leader in online education, primarily through its wholly owned subsidiary Capella University, a regionally accredited online university. In addition, Capella Education Company offers online education through Resource Development International Ltd., an independent provider of UK university distance learning qualifications. Capella Education Company also owns a startup company called Sophia, a social teaching and learning platform that integrates education with technology. Capella University offers online graduate degree programs in business, counseling, education, health administration, homeland security, human resource management, human services, information technology, nonprofit management and leadership, nursing, psychology, public administration, public health, public safety and social work, and bachelor's degree programs in business, information technology, nursing, psychology and public safety. These academic programs are designed to meet the needs of working adults, combining high quality, competency-based curricula with the convenience and flexibility of an online learning format. Currently, Capella University offers 44 graduate and undergraduate degree programs with 149 specializations. Nearly 35,000 learners were enrolled as of Sept. 30, 2012, with about 75% of learners enrolled in graduate degree programs.
CPLA trades at 9.8x trailing 12 months P/E, a 59% discount to its five average P/E of 24.1. Its previous historical low was 7.8x P/E in 2011. CPLA also trades at 2.7x trailing 12 months EV/EBITDA and 0.87x PEG. In terms of asset-based valuations, CPLA is trading at 2.41x P/B, lower than Global Financial Crisis valuations of 2.47x P/B. CPLA had achieved a five-year average ROE of 25.4% and a five-year book value per share CAGR of 14.9%.
Financial and Business Risks
CPLA is debt-free with cash and cash equivalents of $117 million representing 32% of its market capitalization of $363 million.
The post-secondary education market is highly fragmented and competitive, with no private or public institution enjoying a significant market share. CPLA competes with traditional public and private two-year and four-year colleges and other for-profit schools, as well as corporate universities and software companies providing online education and training software.
A significant percentage of CPLA's learners rely on the availability of Title IV program funds to cover their cost of attendance at Capella University and related educational expenses. If CPLA loses its Title IV eligibility, it would be unable to continue business as it currently is conducted. The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. Changes to the Higher Education Act, including changes in eligibility and funding for Title IV programs, are likely to occur in subsequent reauthorizations.
Under the “90/10 Rule” rule, CPLA will be ineligible to participate in Title IV programs if for any two consecutive fiscal years it derives more than 90% of its cash basis revenue from Title IV programs. In 2011, CPLA derived 79% of revenues from Title IV programs. According to management, the 90/10 Rule percentage for CPLA has increased over the past several years and CPLA expects further increases in the near term.
To remain eligible to participate in Title IV programs, CPLA must maintain student loan cohort default rates below specified levels. If CPLA’s two-year cohort default rate exceeds 25% for three consecutive years or 40% for any given year, it will be ineligible to participate in Title IV programs and, as a result, its students would not be eligible for federal student financial aid.
Business Quality and Capital Allocation
CPLA introduced the Pathways for College Credit pilot through its wholly owned subsidiary, Sophia. The Pathways for College Credit program is an innovative program that offers convenient online learning covering general education requirements for a fraction of the cost of a faculty-led college course. Students learn at their own pace and learn the way they learn best by utilizing Sophia's social education platform. Sophia's students can receive academic credit from Capella University for their general education requirements by successfully demonstrating college-level competencies. In terms of pricing, Sophia's general education course would be roughly 80% lower than a faculty-led program at Capella University.
CPLA drives differentiation by addressing employer preference. It is aligning programs with the needs of employers and employees in target verticals. For example, CPLA designed a program specific to the needs of United Healthcare that allows nurses to have two focus areas in nurse leadership and nurse education.
CPLA does not pay a dividend. From 2008 to 2011, CPLA invested $226 million in share repurchases, comparing favorably with only $197 million of free cash flow generated during the same period. It repurchased 1,131,000 shares during the first three quarters of 2012 for total consideration of $38 million. Shares outstanding have decreased by 20% compared with the share count four years ago, indicating significant value creation for shareholders.
CPLA is in a bad business with significant regulatory and competitive risks. However, current trough valuations, supported by a debt-free balance sheet, cash representing 32% of its market capitalization and an active repurchase program, make CPLA an attractive buy.
The author does not have a position in any of the stocks mentioned.
Stocks Discussed: CPLA,
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