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Why Shares of Capella Education Company Dropped

By Jeremy Bowman – Feb 18, 2014 at 2:37PM

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Is this meaningful? Or just another movement?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Capella Education Company (CPLA) were getting held back today, falling as much as 11% after it posted its fourth-quarter earnings report.

So what: The for-profit educator actually beat earnings estimates, delivering a profit of $0.79, up from $0.68 a year ago and better than expectations of $0.77, while revenue ticked down 0.9% to $106 million, slightly below the consensus $106.4 million. Those numbers were decent, but what seemed to shake investor confidence was new enrollment falling 6.8% in the quarter. New students are considered the lifeblood of the industry, and a forward indicator of future performance. If new students are declining, sales and profits will eventually follow. Overall student enrollment dropped 2.5%.

Now what: Times have been tough for the for-profit education industry as the Obama administration has cracked down on operators, at times threatening to remove accreditations, and students seem have grown weary of taking on excessive debt. Still, in the current quarter Capella expects new enrollment to recover to "slightly positive" as CFO Steve Polacek said that "performance trends stabilized in 2013." Given that moderation and the improving cost equation, I'd say today's drop looks mostly valuation-based. I'm not a big fan of the education sector, but Capella looks relatively stable for a volatile industry.

Jeremy Bowman has no position in any stocks mentioned, and neither does The Motley Fool. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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