For-Profit School Prepares Students For Public Sector

Like it or not, the government is growing. And in a time of high unemployment, it’s providing some of the few openings for job seekers.

So Capella Education’s (CPLA) new School of Public Service Leadership came at an opportune time. Announced in June, it’s offering bachelor’s, master’s and doctoral degrees in public administration through Capella University’s all-online classes.

"At the federal level alone, it’s estimated that more than half the supervisors will be eligible to retire in the next several years," Capella University President Christopher Cassirer said in a statement at the time. "This is happening at the same time that President Obama has put out a national call for Americans to serve their communities and for government agencies to work together with nonprofit organizations and the private sector and learn from each other’s successes."

‘Vertical’ Education
The new school represents Capella’s fourth "vertical," after behavioral health and human services, business management and technology, and education. Within those verticals are 36 academic programs with 124 specializations.

Capella’s other three verticals are all common ones for for-profit colleges, which generally cater to working adults looking for added credentials or a lucrative career change. But Signal Hill analyst Trace Urdan says Capella is the only commercial school he knows of offering public-service degrees. Generally, that sector is served by nonprofit schools such as Harvard’s Kennedy School of Government.

"It’s not a market that investors know very much about," Urdan said. "It’s off to a strong start, but it’s not a driver of growth at this point."

Working in nonprofit schools’ territory isn’t new for Capella. It’s known for charging more tuition and being pickier about its admissions than other for-profit colleges. Many of its students are qualified for good state universities but don’t have the time to take regular classes.

"If you’re getting your master’s (in education) not because you want to get a pay bump in the fall, but because you see yourself as the principal, a district superintendent, and one day the secretary of education, that’s the audience that Capella is trying to appeal to," Urdan said.

The strategy seems to be working, because Capella’s students have a good history of repaying their loans. Its two-year cohort default rate is just 2.5%. The industry average runs in the low double digits.

That’s important not just to the students, but it also means Capella will probably dodge a regulatory bullet. Over the last few years, the Department of Education has been cracking down on what it sees as predatory practices by the for-profit school industry, getting students into debt they can’t escape. Urdan compares it to subprime loans in the real estate industry.

Updated rules have continued to leak from the Education Department, including a reported draft proposal earlier this month setting standards for graduation and job-placement rates. But analysts say Capella should have no trouble with them because of its strong repayment record.
Student satisfaction has also fed Capella’s bottom line. Since going public in 2006, it has turned out one growth quarter after another. In the fourth quarter of 2009, revenue climbed 25% from a year earlier to $94.5 million. Profit rose 33% to 88 cents a share. Enrollment reached almost 34,000, up 26% from the end of 2008.

The good results over the last two years have partly been due to the countercyclical nature of the industry, analysts say. During recessions, unemployed people often go back to school. Employed people often seek more credentials to help them hang on to their jobs.
Analyst Jeffrey Silber of BMO Capital Markets says that if this recession is like the last one, schools may be hitting the peak about now.

"What happened last cycle was the recession ended in November 2001, the unemployment rate peaked in June of 2003, and we still saw strong enrollments for these companies in 2004," he said. "But starting in late 2004 you started to see some sizable slowdown."

Peak Enrollment
Silber says his estimates have Capella’s enrollment growth peaking in the quarter just ended. But "it’s not going to fall off a cliff, by any means."

Actually, the company may not want to see enrollment growing too fast because that might compromise its reputation for selectivity. Urdan says that when a new CEO and university president came aboard just over a year ago, some analysts were wondering if the new team "gets it." But he said that after meeting with them, he’s confident they will continue Capella’s tradition.

Management’s most recent guidance calls for enrollment growth to continue at 25% to 27% a quarter for the rest of this year. The leadership wasn’t available for comment due to the quiet period before first-quarter results are announced next Tuesday.

But analysts polled by Thomson Reuters are expecting quarterly profit of 78 cents a share, up 59% from a year ago. For the full year, they see 40% growth to $3.52 a share.


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