Capella Education shares suffer by association

For investors in for-profit colleges, it's been a tough semester.

Shares of Minneapolis-based Capella Education Co. are down 29 percent since Dec. 13, a loss of more than $370 million in shareholder value. Corinthian Colleges Inc. and Apollo Group Inc., the parent company of the University of Phoenix, have sunk 56 percent and 23 percent, respectively, on fears that the credit crunch will dry up loan sources for current and future students.

How spooked are investors? When Capella reported fourth-quarter earnings Feb. 14, shares sank $6.21, or 10 percent, even though Capella beat its own 2007 projections for revenue and earnings growth.

But analysts say Capella should be graded on a different curve from some of the other for-profit schools because it gets only about 1 percent of its revenue from private loans. Most of its students rely on federally guaranteed student loans that aren't at risk.

"Capella does not have exposure to the risks posed by credit crisis. But it is affecting others in their industry group, and in the stock market Capella is connected at the hip to those companies," said Trace Urdan, an analyst with Signal Hill Group in Baltimore. "It's not realistic to think they would be unaffected."

The company agrees.

"The market has reduced the valuation multiples of the higher-education sector because of general nervousness about student loans," said Steve Shank, Capella's CEO. "We got readjusted with the others."

But Capella's declining stock price may not be entirely related to the credit crunch. At its peak in November and December, its share price was nearly four times its initial public offering price of $20 a year earlier. A pullback might have been inevitable.

And, looking into 2008, the company adopted a more cautious tone than investors expected. Nobody wants to be the last one holding shares of a growth company when growth has slowed.

Capella doesn't project per-share earnings, but based on other financial data the company was projecting 2008 earnings of $1.49 to $1.61 a share, said Mark Marostica, an analyst at Piper Jaffray & Co. in Minneapolis. That was lower than Marostica's estimate at the time, $1.62 per share, and the Wall Street consensus of $1.65.

Added to the lower-than-expected 2008 financial projections was the hint that Capella's less-profitable undergraduate enrollment was growing faster than its more-lucrative graduate enrollment. The company says the rapid growth in bachelor's enrollment was just a blip, not a trend. (Currently, 84 percent of Capella's students are in master's or doctoral programs.)

Investors had to wonder whether that meant "a peaking and slowing in Capella's business, or just the company being conservative in its projections," Urdan said. "I don't think Capella is materially slowing down, but with a stock priced as highly as this one, any shift sends a lot of money in and out of the stock."

Capella is more affected by investor worries than other companies in the for-profit education group because it carries a higher stock multiple to begin with, Marostica said. Last week, Capella's stock was trading at 30.8 times projected calendar year 2008 earnings, while the for-profit education group was trading at an average of 25.3 times 2008 earnings, Urdan said.

Capella has held meetings to reassure investors, Shank said. He tells them the availability of federally guaranteed loans is solid.

"Neither Congress, nor the administration nor the Education Department wants to see a constriction of federally guaranteed student loan funding," Shank said. "It would take congressional action to change the rules, and we don't expect any such action."

Shank said corporate reimbursement for students -- benefit programs under which companies pay some or all of the tuition for employees using Capella -- are solid as well.

"Major corporations treat tuition reimbursement as a benefit," Shank said. "We've not seen a pattern of reducing it during economic downturns."

Steve Alexander • 612-673-4553