Neutral on Strayer Education - Analyst Blog

Strayer Education Inc.(STRA) is a prominent player in the for-profit post-secondary education industry. The company's sustained effort to expand educational programs and open new campuses has boosted enrollments and its top line.

Total revenue for third-quarter 2010 came in at $147.6 million, slightly ahead of the Zacks Consensus Revenue Estimate of $146 million, but grew 29% from the prior-year quarter, buoyed by a rise in enrollment and a 5% increase in tuition fees, effective January 2010.

Strayer Education also portrays a healthy debt-free balance sheet, and is actively managing its capital, returning much of its free cash to shareholders via share repurchases and dividends.

However, what matters is the decelerating growth in enrollments. After increasing 22% in second-quarter 2010, the rate of growth in campus-based students dropped to 11% in the third quarter. Moreover, the rate of growth in online students fell to 18%, following a 31% increase in the previous quarter. The company also informed that new student enrollment dropped 2%.

The current potential risk looming over the education sector is the regulation proposed by the Department of Education that may weigh upon students' enrollments and the company's profits. Recently, the Department of Education proposed that an educational program could only qualify for Title IV funds, if it helps achieve gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios.

The company derives a major portion of its revenue from federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.

Educational institutions such as Capella Education Company (CPLA) now expects enrollment to rise in the range of 16% to 17% in fourth-quarter 2010, reflecting a slower growth compared with the previous quarters. The sector bellwether Apollo Group Inc. (APOL) also cautioned that enrollment in its first-quarter 2011 would drop by more than 40%, and withdrew its outlook for the fiscal year, citing an uncertain regulatory environment. 

Given the pros and cons, we prefer to be ‘Neutral' on the stock. However, Strayer Education holds a Zacks #5 Rank, which translates into a short-term ‘Strong Sell' rating.

 
APOLLO GROUP (APOL): Free Stock Analysis Report
 
CAPELLA EDUCATN (CPLA): Free Stock Analysis Report
 
STRAYER EDUC (STRA): Free Stock Analysis Report
 
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