Strayer Education (STRA, Financial) manages for-profit colleges. It reported third-quarter results last week, and the stock has dropped 9% to $53 per share. Strayer University was founded in 1892 and currently has approximately 80 physical campuses (see campus locations below). The company offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, health services administration, public administration and criminal justice. Strayer University also offers an executive MBA online through the Jack Welch Management Institute.
Here are some of the highlights from the Oct. 28 conference call:
- Q3 revenue per student declined 3.8%.
- The 2012 three-year cohort default rate (CDR) is 11.6% versus 15.8% for all proprietary institutions.
- Total enrollments increased 2%, aided by a 3% increase in continuing student enrollment.
- Revenue of $99.1 million, a decrease of 2% from 2014
- Income from operations was $7.3 million versus $9.2 million for last year.
- Excluding noncash adjustments, income from operations was $6.9 million for this year and $7.7 million last year.
- Our operating margin was 6.9% for the quarter compared to 7.6% in 2014.
- Net income for the quarter was $3.7 million compared to $5 million for the same period in 2014. Excluding the noncash adjustments, net income was $3.5 million this year and $4 million for last year.
- CEO believes enrollment declines have stabilized.
Industry
The for-profit college industry has had some tough years recently. It rightfully has been under heavy government scrutiny because of exploding student debt and predatory recruiting practices. Earlier this year, one of the country’s largest for-profit institutions, Corinthian Colleges, the parent company of Heald and Everest Colleges, was shut down for a number of infractions including falsifying job placement reports to recruit students. In a move to improve the student debt situation, the U.S. Department of Education instituted the gainful employment rule in July of this year. According to the U.S. Department of Education website:
Under the new regulations, a program would be considered to lead to gainful employment if the estimated annual loan payment of a typical graduate does not exceed 20% of his or her discretionary income – what is left after basic necessities like food and housing have been paid for – or 8% of his or her total earnings. Programs that exceed these levels would be at risk of losing their ability to participate in taxpayer-funded federal student aid programs. Today, gainful employment programs will start to be held accountable to these outcomes, and the worst performing programs will lose eligibility for federal Title IV student aid if they do not improve. In addition, failing programs that may present a risk to students if they lose eligibility will have to start notifying students.
You can see the fact sheet on gainful employment here. The fact sheet says, “The first several years will include a transition period that will take into account any immediate steps by institutions to reduce costs and debt." I don’t expect the gainful employment rule to have any effect on company results for some time as it will take time to collect income data. In the long run, I expect the law to have a significant impact on industry profits. Here’s a sobering quote about the industry, “The department estimates that about 840,000 students are currently enrolled in programs that would not pass [the gainful employment rule] – and of those students, 99% of them are in programs at for-profit institutions.”
TTM company financial metrics
From company website
Strayer’s revenues peaked in 2010 at $637 million. Revenues then quickly declined to $446 million in 2014 as enrollments dropped. Net income followed a similar pattern going from $131 million in 2010 to $46.4 million in 2014. It should be noted that there were large write-offs in 2013 which caused the stock to fall to as low as $34 per share. The stock rebounded in 2014 to $79 per share partly because of easy comparisons. On a TTM basis, the company’s financial metrics look attractive. The PE ratio is 13.8. Over the last 15 years, the company’s PE ratio has ranged from 9.7 in 2012 to 55 in 2003. The average PE ratio over the last five years was 15. The company’s debt to equity ratio stands at a manageable 0.96. The current ratio is 2.08.
Final thoughts
When I started researching this company, I was heavily biased against it. I have a poor impression of the entire industry. I wrote a post on Apollo Education Group (APOL, Financial), the operator of University of Phoenix, a couple of weeks ago. I opined that it was a value trap and the stock has fallen about 30%. Apollo is being investigated by the government for multiple issues related to its recruitment and marketing practices. Strayer, on the other hand, is not being investigated. That along with Strayer’s low cohort default rate relative to the industry and its financial metrics made me give the company a second look. My thesis then became dependent on enrollments rebounding. My secondary assumption was that negative publicity needs to subside before enrollments will rebound. I researched recent negative articles.
What I found is that bad publicity has come down as measured by a number of articles, but there’s been renewed industry scrutiny surrounding colleges profiting from people in the military . I noticed negative comments on Strayer in some of the articles. I also found its reviews on consumeraffairs.com. Strayer got 1.5 stars out of 5 based on 327 reviews. There are numerous posters detailing accounts of extreme incompetence bordering on fraud. I imagine another headwind is that many potential students know friends or family that have been affected by student debt and have heard the horror stories.
We are also heading into an election year where student debt will likely be a heavily discussed topic as politicians seek to get the youth vote. My guess is that the for-profit college industry will not be shown in a favorable light during the election cycle. One other note: I looked up Strayer’s stats on collegescorecard.org, and I saw that their graduation rates hover around 40% and their average annual cost hovers around $29,000. The graduation rate is OK, but the annual cost is outrageous. Bottom line, I have a hard time seeing enrollments rebounding significantly because of a challenging environment. In addition, it does not seem like the average student has a favorable outcome attending Strayer. I will pass on this stock. There are some gurus that hold Strayer as a small percent of their portfolios including Paul Tudor Jones (Trades, Portfolio), Jim Simons (Trades, Portfolio), and Joel Greenblatt (Trades, Portfolio).
