Foolish Forecast: Capella Ready to Sing

How often do you get the chance to invest in a firm that's never, ever missed an analyst earnings target? I'm guessing not often -- but your chances improve greatly when the firm in question has only been public for nine months, and only reported twice. Speaking of which, Capella Education (Nasdaq: CPLA  ) reports its Q2 2007 numbers on Thursday, only its third report ever.

What analysts say:

  • Buy, sell, or waffle? Nine analysts study this exclusively on-line, for-profit educator, and every one of them rates it a buy.
  • Revenues. On average, they're looking for $53.4 million in revenues.
  • Earnings. Profits are predicted to come in at $0.25 per share.

What management says:
Just days before releasing earnings, Capella announced that it has also released its Senior Vice President of Operations and Business Transformation. Paul Schroeder, a veteran of Datacard, NCR (NYSE: NCR  ) , and AT&T (NYSE: T  ) , is leaving "to pursue other professional interests." No replacement has been named. Capella also released a board member, Gordon Holmes, a Goldman Sachs (NYSE: GS  ) alumnus and former board member of Citadel Broadcasting (NYSE: CDL  ) . Again, no replacement has been nominated.

Prior to these announcements, the big news at Capella was that the company had settled (apparently true) allegations that it was involved in the ongoing student loan scandal. Investigating the role of one of its employees in accepting unauthorized compensation from private lender Student Loan Xpress, halting the practice in its steps, and "adopting a Code of Conduct recently established by the New York Attorney General's office to ensure best practices in student lending" appear to be the extent of Capella's liability under the settlement. The announcement made no mention of any financial sanctions, though if the deal went anything like DeVry's (NYSE: DV  ) settlement, all Capella should need to do is disgorge the payments from Student Loan Xpress -- about $12,400 in all.

What management does:
So -- not one analyst says Capella is anything other than a "buy?" Well, I guess that's not surprising, based on the margin trends we see below. Rolling gross margins have risen in every quarter over the past year, and rolling operating and net margins in each of the last three.

Margins

12/05

3/06

6/06

9/06

12/06

3/07

Gross

52.3%

52%

52.4%

53.3%

53.9%

55%

Operating

10.1%

8.6%

8.6%

9.3%

12.3%

13.2%

Net

6.9%

5.9%

5.6%

5.9%

7.5%

8.2%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
What's more, profitability looks set to continue growing at Capella. According to the guidance management gave last quarter, the firm is looking to grow enrollment north of 20% in Q2 -- with revenues rising even faster (indicating that tuition is growing, and suggesting the firm has pricing power).

The strength and scalability of Capella's all-on-line-all-the-time business model should also make itself felt. Management projects at least 10% operating margins for the quarter, and believes that as this year progresses, it will boost that number to 11% or 12%, with enrollment and revenues both continuing to grow in the low 20s. Put another way -- the firm aims for 20%-plus revenue growth, while extracting 50% more profits from each of those additional revenue dollars, than it was managing at last report. If it achieves this, why, analyst consensus estimates of 25% long-term profits growth might even be on the low side.

What else do we know about Capella? Not a whole lot, directly -- but we do know that one of the best stock shops of Wall Street likes it. Find out why here. And find out just how good a stock picker BMO Capital Markets is here.

Other Foolishness:

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.


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