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Deutsche Bank Starts Capella Education (CPLA) At 'Hold', $39 PT

 April 03, 2012 03:06 PM

Deutsche Bank analyst Paul Ginocchio initiated coverage of Capella Education Co. (Nasdaq: CPLA) with a "Hold" rating and $39 price target.

Ginocchio said Capella Education is a well-established provider of graduate degrees with a 19-year history of providing distance and online-only education.

However, relatively high tuition rates, a nascent branding campaign and mounting competitive pressure from traditional universities and For Profit peers pose a risk to growth and margins.

While Ginocchio sees some upside to shares, it is offset by concerns over longer term positioning and outlook and more compelling opportunities elsewhere.

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Based on analysis of the major nonprofit competitors, their growth, and the overlap with For Profits, the analyst believes the growth of the nonprofits is taking about 3 points off the enrollment growth of the For Profit sector, and up to 6 points off the growth rate of online enrollment growth for the For Profits.

Ginocchio believes this headwind will get incrementally stronger with each passing year. He has built a simple model with three assumptions to help investors size the impact.

The analyst did not think the overlap in addressable markets was significant between the nonprofits and For Profits. But based on conversations with nonprofit executives, lead generation execs, and reviewing the admission policies of the nonprofits, he thinks the addressable online market overlap is about 30%.

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For a couple of the nonprofit schools Ginocchio spoke to, their new students say that the University of Phoenix was the most often considered other school. A strong brand that communicates a quality education is, in his view, crucial to long-term For Profit success.

CPLA is trading down 1.98% at $36.13 on Tuesday.

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