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Capella (CPLA) Up on Q3 Earnings, Strayer Deal Announcement

Shares of Capella Education Company CPLA rallied 30.5% to $85.45 following its third-quarter 2017 earnings release on Oct 30.

The company reported earnings of 73 cents per share in the quarter, which surpassed the Zacks Consensus Estimate of 68 cents by 7.4%. However, earnings declined 9.9% year over year.

Capella Education Company Price, Consensus and EPS Surprise

Capella Education Company Price, Consensus and EPS Surprise | Capella Education Company Quote

Capella-Strayer Merger

In a separate news release on the same day, Strayer Education, Inc. STRA and Capella announced an all-stock merger deal of equal transactions. Capella shareholders will be receiving 0.875 Strayer shares for each Capella share, which represents a 22% premium over the Capella stock closing price on Oct 27 of $65.50.

Based on the closing price of Strayer and Capella common stock as of Oct 27, 2017, the implied equity value of the combined company is approximately $1.9 billion. Also the merger is expected to achieve annual cost savings of approximately $50 million to be fully phased in within 18 months of closing.

Notably, the transaction is expected to close in the third quarter of 2018. Post-completion, Strayer shareholders will own approximately 52% of the combined entity and Capella shareholders will own the remaining 48% of the company.  The combined entity will be renamed Strategic Education Inc. and its ticker symbol will remain STRA.

The combined company is aimed to become a national leader in education innovation, wherein both the companies expect to accelerate innovation in key products and services and return capital to shareholders through an expected annual dividend of $2.00 per share following the close of the transaction.
 
The merger is expected to ensure student success and positive employment outcomes. A shared effort by the companies is expected to improve academic outcomes by combining each of the university’s competencies. The merger will also facilitate a diversified product offering that will result in a more balanced revenue mix.

Revenues and Enrollment

Capella’s quarterly revenues of $107 million fell short of the Zacks Consensus Estimate of $108.5 million by 1.4%. Meanwhile, revenues improved 1% from the year-ago level despite declining enrollment.

Capella reports under two segments — Post-Secondary and Job-Ready Skills. While the Post-Secondary segment comprises Capella University and Sophia Learning, the Job-Ready Skills segment covers Capella Learning Solutions, Hackbright Academy and DevMountain.

Post-Secondary: The segment reported revenues of $104.4 million, up 0.9% year over year in spite of a decline in enrollment. However, the operating margin of 15.5% showed a year-over-year decline of 90 basis points (bps).

Capella University’s total active enrollment declined 1.3% to 37,223 learners, while new enrollment dropped 2.1% on a year-over-year basis. Early cohort persistence improved approximately 2% year over year.

Job-Ready Skills: The segment reported revenues of $2.6 million in the third quarter, compared with $2.4 million in the prior-year quarter. The segment reported an operating loss of $2.4 million, compared with $1.6-million loss in the prior-year quarter.

Margins

Capella’s operating income from continuing operations was $13.8 million, down 9.8% from the year-ago figure. Operating margin of 12.9% deteriorated 160 bps year over year.

Financials

Capella, in the first nine months of 2017, generated $56.3 million in operating cash flow from continuing operations, compared with $ 76.8 million in the prior-year period.

The company ended the quarter with cash and cash equivalents of $112.2 million, compared with $93.6 million at 2016-end.

Capital expenditures in the first nine months of 2017 totaled $17.8 million.

Dividend

During the third quarter, Capella declared a quarterly cash dividend of 41 cents per outstanding share of common stock. The dividend was paid on Oct 13.

Also, in the quarter under review, Capella repurchased approximately 37,000 shares for a total consideration of $2.5 million. The remaining authorization was $27.9 million, as of the end of the quarter.

2017 Guidance

Capella did not provide any financial guidance for 2017. The company also suspended its previously issued guidance because of the pending merger transaction.

Zacks Rank & Upcoming Peer Releases

Capella currently carries a Zacks Rank #3 (Hold). You can see  the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Public Education, Inc. APEI is scheduled to report third-quarter results on Nov 7. The Zacks Consensus Estimate for quarterly earnings is pegged at 21 cents.

Adtalem Global Education Inc. ATGE is scheduled to release its quarterly numbers on Nov 2. The Zacks Consensus Estimate for earnings is pegged at 48 cents.

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DeVry Education Group Inc. (ATGE): Free Stock Analysis Report
 
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