The stock of Strategic Education (NAS:STRA, 30-year Financials) gives every indication of being 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 $72.93 per share and the market cap of $1.8 billion, Strategic Education stock is estimated to be 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
Link: These companies may deliever higher future returns at reduced risk.
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 0.75, 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 $1.1 billion and earnings of $2.67 a share. Its operating margin is 11.31%, 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 the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Strategic Education is 3.4%, which ranks in the middle range of the companies in Education industry. The 3-year average EBITDA growth rate is 16.8%, which ranks in the middle range of the companies in Education industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Strategic Education's ROIC is 5.28 while its WACC came in at 4.28. The historical ROIC vs WACC comparison of Strategic Education is shown below:
In conclusion, 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.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
