Capella stock plunges on tighter enrollment requirements

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Capella Education Co., the Minneapolis-based provider of more than 1,000 online college courses, said enrollment growth would slow as it toughens admissions standards.

The price of Capella shares fell $12.54 or 18.6 percent to $54.80 at 4 p.m. New York time in Nasdaq Stock Market composite trading. As of Monday, the shares had declined 11 percent so far this year.

The company will require entrance exams, starting in November, for the least-prepared students applying to its bachelor's degree programs, said Kevin Gilligan, chairman and chief executive officer, in a conference call with investors today. The tests may lead those students to look for education elsewhere, slowing enrollment growth, he said.

For-profit colleges are under pressure because of proposed regulations from the U.S. Department of Education that would crack down on sales practices. Capella forecast fourth-quarter enrollment would increase 16 to 17 percent, less than analysts expected, and continue to slow in 2011.

The size of the anticipated fourth-quarter slowdown "definitely came as a surprise to us," Amy Junker, an analyst with Robert W. Baird & Co. in Milwaukee, said in an interview. "We were not anticipating that." Junker had expected 25 percent enrollment growth in the fourth quarter.

Capella's share price fell $9.39, or 14 percent, to $57.95 at 10:59 a.m. New York time in Nasdaq Stock Market composite trading. The shares had declined 11 percent this year through Monday.

Senator Tom Harkin, an Iowa Democrat, is investigating for- profit colleges' recruitment practices, program quality and use of government funds.

Apollo Group Inc.'s University of Phoenix, the largest for- profit college by enrollment, and Washington Post Co.'s Kaplan chain, the third-biggest, also announced new programs that may weed out unprepared applicants. Capella is now facing increased competition for the best-prepared students, Gilligan said.

Capella offers bachelor's, master's and doctoral degrees in fields such as business, health and education.

The company Tuesday reported third-quarter net income rose to $13.5 million, or 80 cents a share, from $9.78 million, or 57 cents, a year earlier, the company said.

Third-quarter enrollment increased by 26 percent from a year earlier, to 38,634, the company said, after rising 32 percent in the previous three-month period.

Third-quarter revenue rose 26 percent to $105 million, from $83.6 million a year earlier, Capella reported.

Revenue should rise 20 to 22 percent in the fourth quarter, the company said. Based on the company's forecast, revenue should reach $113 million to $115 million, instead of the expected $119 million, and per-share earnings would be $1.06 to $1.12, below analysts' consensus estimate of $1.18, Junker said

On Oct. 13, Apollo withdrew its forecast for the accounting year ending Aug. 31, 2011, citing regulatory scrutiny and a possible 40 percent decline in new students. An index of 12 education stocks plunged 18 percent the day after Apollo's forecast.

About 80 percent of Capella students are enrolled in master's degree or Ph.D. programs and are mostly employed adults looking to move up in their careers, Gilligan said during a Sept. 23 presentation to investors. That differentiates Capella from most competitors that focus on students at the associate or bachelor degree level, he said.