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On Mar 18, Zacks Investment Research downgraded Capella Education Company (CPLA - Analyst Report) to a Zacks Rank #5 (Strong Sell) due to tepid fourth quarter results and a disappointing outlook for the upcoming first quarter of 2013.

Why the Downgrade?

Capella Education Company witnessed sharp downward estimate revisions after reporting tepid fourth-quarter 2012 results. On Feb 12, Capella Education reported fourth-quarter earnings per share of 73 cents, missing the Zacks Consensus Estimate by a penny and the year-ago earnings by 16.4%.

Year-over-year decline in revenues and margins proved to be a drag on earnings. Revenues slipped 2.7% year over year in the quarter. Better-than-anticipated new enrollment growth could not offset the downward drift in earnings. On the other hand, operating margin contracted due to increase in bad debt expenses.

Sluggish macroeconomic conditions and low employment levels have been taking a toll on private education companies like Capella and Apollo Group Inc. (APOL - Analyst Report) by adversely affecting enrollment. The outlook for the upcoming quarter was also quite weak. Though the company expects new enrollment to rise 5% in the first quarter of 2013, total enrollment is expected to decline 3% to 4% from the prior-year quarter, which is expected to result in 4.5% to 5.5% decline in total revenue. Revenue per student is also expected to decline 2% due to fewer grants and change in mix.

Operating margin is expected to be in the range of 12.0% to 13.0%, down from 16.4% in the prior-year quarter due to decline in total enrollments.

Majority of the estimates of this education company have been on a downtrend for the past 60 days, with declining top-line growth rates and operating margin anticipated for the upcoming first quarter 2013.  

The Zacks Consensus Estimate for 2013 decreased 10.8% to $2.48 per share over the last 60 days. For 2014, most of the estimates were revised downward over the last 60 days, sinking the Zacks Consensus Estimate by 17.7% to $2.75 per share.

Other Stocks to Consider

Not all education stocks are performing as poorly as Capella Education. Education stocks such as DeVry Inc. (DV - Analyst Report) and Grand Canyon Education, Inc. (LOPE - Snapshot Report) are currently performing well and are worth considering. Both hold a Zacks Rank #2 (Buy).

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