Bearish on Strayer Education - Analyst Blog

We recently downgraded our recommendation on Strayer Education Inc. (STRA) to Underperform with a price target of $112.00. Earlier we had a Neutral rating on the stock. The company also holds a Zacks #5 Rank, which translates into a short-term ‘Strong Sell' rating.

The educational institute, which offers degree programs in business administration, accounting, information technology, education and criminal justice, witnessed a 20% fall in new student enrollment for the winter 2011 term compared with a 16% growth experienced in the same period last year.

Given the decline in new student enrollment for the winter 2011 term, Strayer Education provided four hypothetical situations, but did not give any official guidance. The for-profit education company informed that if annual enrollment drops 5%, its revenue may remain flat or fall 1% and earnings may lie between $7.50 and $7.70 per share. If enrollment rises 5%, Strayer Education hinted that revenue may witness a growth of 9% to 10% and earnings may fall in the range of $10.10 to $10.30.

The Arlington, Virginia-based Strayer Education also notified that if enrollment remains flat with the 2010 level, revenue would register a growth of 4% to 5% and earnings would be in the range of $8.80 to $9.00 per share.

The company also hinted that if enrollment rises by 13%, revenue may increase between 17% and 18% and earnings would be in the range of $11.30 to $11.50 per share, as projected earlier. The guidance includes a 5% increase in tuition fees effective January 1, 2011, and the opening of eight new campuses in 2011.

Following these, a negative sentiment is palpable among the analysts and we are witnessing a fall in the Zacks Consensus Estimates. The fourth quarter 2010 and the first quarter 2011 Estimates dropped 2 cents and 40 cents, to $2.64 and $2.63, respectively, in the last 7 days. Fiscal 2010 and 2011 Estimates dipped by 2 cents and $1.71, to $9.62 and $9.21, respectively, in the last 7 days.

The current potential risk looming over the education sector is the regulation proposed by the Department of Education. The Department of Education proposed that an educational program could only qualify for Title IV funds if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios.

The company derives a major portion of its revenues 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. Consequently, for-profit education companies may witness declines in student enrollments.

The sector bellwether Apollo Group Inc. (APOL), which recently posted first-quarter 2011 results, said that total degreed enrollment dipped 3.8% compared with the year-ago quarter, as new degreed enrollment plunged 42.4%. However, the company's quarterly earnings of $1.63 per share outpaced the Zacks Consensus Estimate of $1.35, providing some cushion to the stock.

 
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