Shares of educational services company Startegic Education Inc. (STRA, Financial) are down more than 44% since July 28. The share price has plummeted over the last two months— notably after the second-quarter earnings results were announced at the end of July.
This came despite the company improving on the previous year's quarterly results and outperforming analyst expectations on both revenue and earnings for the quarter. The company, however, provided weak revenue guidance for the third quarter and full year. This could be what triggered the decline in the stock.
Nonetheless, Strategic Education's story goes beyond its recent guidance for top-line performances. The company operates through two main verticals, Strayer University, which accounts for a majority of the revenue at 56%, and Capella University with 46%. Strayer is expected to experience a slowdown in new undergraduate student admissions in the coming enrollment windows amid the Covid-19 pandemic. And being the majority revenue contributor, this will affect the overall top-line growth.
On the other hand, Capella focuses on graduate programs and, therefore, does not expect significant adverse effects from the pandemic. As such, Strategic Education expects revenues to be flat in the coming quarter and up by about 1% for the full-year results.
The average U.S. college tuition fees increased by about 12% between 2019 and 2020, but U.S. News and World Report suggests that fees will remain relatively unchanged in 2021, which again affects top-line potential. Both these factors have resulted in a massive discounting of the company's stock price.
Why this could be an opportunity to buy
One of the main reasons behind the current decline in share prices is that the adverse impact of Covid-19 on the education sector could trigger a new approach to learning. Since the pandemic, learning institutions have been forced to adopt modern technologies to implement e-learning programs.
But this is not a new idea. Several educational institutions have offered online degrees for decades now. In fact, some of the newer universities like Abraham Lincoln University are formed to focus on online education, which allows multinational students to enroll in programs without worrying about relocation and accommodation costs. As such, the idea that a changing concept to approach to learning will affect education stocks in the long term cannot be justified.
In fact, given the platform that traditional learning institutions like those operating under Strategic Education, it easier to adapt to the changing educational environment. The reputation they have built over the years provides them with the edge they need to remain competitive.
Another thing that investors can look at for optimism is the massive decline in the average interest rate for undergraduate student loans. The Federal Reserve cut the base interest rate to 0.25% down from 2.5% over the last 15 months. This has resulted in a massive reduction in the interest rate for federal direct undergraduate student loans to 2.75% down from 4.53% in the fiscal year 2019-20. The interest rate for unsubsidized direct student loans also decreased from 6.08% to 4.30% according to Nerd Wallet.
Ideally, this will result in cheaper interest costs on college loans, which could encourage more student spending on college products and services. This will boost the top lines of for-profit education companies like Strategic Education.
From a valuation perspective, shares of Strategic Education appear to be competitively valued at a forward price-earnings ratio of 13.40. Its closest peer, Grand Canyon Education Inc. (LOPE, Financial), trades at a slightly more attractive forward price-earnings ratio of 13.33. On the other hand, the likes of New Oriental Education and Technology Group Inc. (EDU, Financial) and TAL Education Group (TAL, Financial) appear more expensive with their forward price-earnings ratios of 39.53 and 81.30.
Disclosure: No position in stocks mentioned.
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