Expansion part of Capella's lesson plan

THE MINNESOTA INVESTOR GENE WALDEN

As classes resume this fall, nearly 2 million college students will be attending school without leaving home.

Online college courses are a rapidly growing segment of the nation's higher education curriculum. They've also become a very profitable business for the companies that offer online degrees.

Minneapolis-based Capella University, which operates under its parent company, Capella Education Co., continues to see its enrollment increase -- along with its revenue and operating earnings. Capella, which focuses primarily on adult students seeking advanced degrees, has seen its enrollment and revenue grow by 20 to 25 percent per year in recent years.

Capella has about 23,400 students from all 50 states. Most are seeking master's or doctoral degrees, although the school has a growing undergraduate program that's now about 16 percent of its enrollment.

Capella's online offerings are part of a growing trend. The largest online college is the University of Phoenix, with more than 300,000 students. The University of Phoenix also offers classes at campuses in 38 states, Canada and Puerto Rico.

Like Capella, the University of Phoenix is a for-profit college. It is owned by Apollo Group, Inc., which trades on the NASDAQ under the symbol APOL. A number of other publicly traded education firms also offer courses both online and at satellite campuses across the country, such as Corinthian Colleges (COCO), Strayer Education (STRA), and Career Education (CECO).

Capella was founded in 1993 by Stephen Shank, who is chairman and CEO -- as he once was for Tonka Corp. It took years before the college was operating at full stride.

"When we began, we faced two challenges," said Shank: to get academic accreditation (which came through in 1997) and "to find a way to use the Internet as a mode of teaching."

In the mid-1990s, relatively few Americans had Internet access and many of them were saddled with slow dial-up modems. But as the Internet became a faster, more pervasive communications tool, interest in online education picked up quickly.

"This is a very powerful tool," says Shank. In fact, he believes it's a more effective mode of education for adult students than the traditional classroom. "Our courses do require a high level of interactivity and discussion, as well as independent learning."

Capella's online courses have one faculty member for every 20 students (or fewer). Semesters run for 10 weeks with each course broken into 10 one-week sessions. Although most courses are taught entirely online, the school's doctoral-level students are required to attend three intensive one-week sessions at locations the college sets up around the country.

Shank hopes to see future enrollment growth of 18 to 20 percent, as well as revenue growth of 18 to 20 percent, and operating earnings growth of 25 to 30 percent.

"Of the 18.3 million Americans seeking higher-education degrees, about 7.1 million are adults over 25 years old," he said. "About one-tenth of all college students (1.8 million) are in fully online degree programs."

Capella has built relationships with many Fortune 1000 companies that encourage employees to take advanced courses through Capella and get tuition reimbursement. Capella also advertises on the Internet and in professional journals.

Stocks in the for-profit education sector have taken a hit this year. After climbing quickly to a high of nearly $75 a share in December, Capella (CPLA) has dropped, to about $49 a share in trading last week, which is close to its 52-week low.

The company, which generates strong annual cash flow, is in the midst of a $50 million stock repurchase program. The shares are already thinly traded, with only about 17 million shares outstanding -- and that number will drop as Capella's repurchase program continues. Even after a 35 percent decline in share price, the stock still carries a fairly rich price-earnings ratio of about 32, which could limit its upside potential in the near future.

But if growth trends in online education continue and if Capella can keep increasing earnings at its projected rate of 25 to 30 percent per year, the high PE should not impede long-term stock price growth.

Gene Walden is the author of more than 20 books about business and investing. He lives in the Twin Cities. Send questions or comments to: gwalden100@comcast.net, or visit Allstarstocks.com.