The stock of Strategic Education (NAS:STRA, 30-year Financials) appears to be possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $93.11 per share and the market cap of $2.3 billion, Strategic Education stock shows every sign of being possible value trap. GF Value for Strategic Education is shown in the chart below.
The reason we think that Strategic Education stock might be a value trap is because its Piotroski F-score is only 3, out of the total of 9. Such a low Piotroski F-score indicates the company is getting worse in multiple aspects in the areas of profitability, funding and efficiency. In this case, investors should look beyond the low valuation of the company and make sure it has no long-term risks. To learn more about how the Piotroski F-score measures the business trend of a company, please go here.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Strategic Education has a cash-to-debt ratio of 0.69, which ranks in the middle range of the companies in Education industry. Based on this, GuruFocus ranks Strategic Education's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Strategic Education over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Strategic Education has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $1 billion and earnings of $3.87 a share. Its operating margin is 13.19%, which ranks in the middle range of the companies in Education industry. Overall, the profitability of Strategic Education is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Strategic Education over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Strategic Education's 3-year average revenue growth rate is in the middle range of the companies in Education industry. Strategic Education's 3-year average EBITDA growth rate is 16.8%, which ranks in the middle range of the companies in Education industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Strategic Education's return on invested capital is 6.84, and its cost of capital is 4.58. The historical ROIC vs WACC comparison of Strategic Education is shown below:
In short, The stock of Strategic Education (NAS:STRA, 30-year Financials) shows every sign of being possible value trap. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Education industry. To learn more about Strategic Education stock, you can check out its 30-year Financials here.
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