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On Oct 5, Zacks Investment Research upgraded Capella Education Company (CPLA - Analyst Report), a provider of online post-secondary education, to a Zacks Rank #1 (Strong Buy) ahead of the third-quarter results due later this month.

Why the Upgrade?

The Capella stock gained significant momentum after it announced strong second-quarter 2013 results on Jul 24.

Capella’s second-quarter 2013 earnings of 83 cents per share surpassed the Zacks Consensus Estimate on the back of better-than-expected top-line growth. Though declining year over year, revenues exceeded the Zacks Consensus Estimate. Moreover, the top-line decline was much narrower than management’s expectation on the back of better-than-expected enrollment growth. New enrollments grew 12.7%, far exceeding management’s expectation of sequentially flat results. New enrollments benefited from double-digit percentage growth in all degrees. Margins also exceeded management’s expectations in the quarter driven by top-line growth and cost savings.

The Zacks Consensus Estimate for fiscal 2013 increased almost 6% and that for 2014 moved up 5% over the last 90 days helped by the solid second-quarter results.

We believe that Capella’s brand-driven marketing strategy and initiatives to improve learner success rates led to the fantastic second-quarter results. In order to improve overall enrollment growth and increase efficiencies, the company is moving away from a direct marketing aggregator channel to a relationship and brand-driven marketing strategy. This is also aimed toward building greater awareness and preference for Capella.

Further, in order to improve student success rates, Capella has refined its marketing strategy to attract students who are more likely to carry on with the course. It is also creating innovative learning technologies, which will meet the needs of the working adults. Further, the company has provided analytical tools to its faculty and advisors to help them identify, track and intervene when a student is at risk of failing a course. Further, continuous innovation and efforts to update courses are boosting enrollments.

Capella is due to report third-quarter 2013 results on Oct 22.  For the third quarter of 2013, revenues are expected to remain flat or increase up to 1%. Operating margin is expected in the range of 8% to 9% for the quarter. We believe that the learner success initiatives and the brand-driven marketing strategy will continue to support growth in the third quarter as well.

Moreover, Capella Education was approved by the Department of Education for a competency based degree in August. The program focuses on learning as opposed to meeting credit hour standards. Other universities are applying for similar status. This movement may help to reduce the cost of education and drive enrollments.

Other Stocks to Consider

Other education companies that carry a Zacks Rank #1 (Strong Buy) are Apollo Group, Inc. (APOL - Analyst Report), ATA, Inc. and TAL Education Group (XRS - Snapshot Report).

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