Strayer Education: Value Investment or Value Trap?
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For-profit, higher-education company Strayer Education (NASDAQ: STRA) experienced a stock price decline of almost 75 percent during the last two years due to Department of Education regulations on student loan repayment rate limits. However, a recent change in the stock's price trend to a upwards direction may be an indication the market again sees value in Strayer's business. In this article, I analyze the possibility that this stock may a value trap, convincing investors the stock has turned up when there's a better chance of more restrictions from the government in the future.
Strayer Education provides primarily bachelor's and master's degree programs at 92 campuses in 22 states and through online degree programs. The company's education programs are designed for working adults who want to boost their earning power by obtaining a first or additional degree. The corporate, for-profit education business has been a growth sector since the late 1990s. Other major players in the field include the Apollo Group (NASDAQ: APOL), DeVry (NYSE: DV) and Education Management Corp. (NASDAQ: EDMC). From the start of the year 2000 through early 2010, the companies that have been in business that long produced stock gains from 200 percent for DeVry to over 1,000 percent for Strayer Education.
In 2010, the wheels fell off the growth train for the for-profit education companies. First, the economic recession stopped or reversed the trend of growing student enrollment. The growth engine for these companies was growing the number of students enrolled in the degree programs. Second, the federal government started to take a close look at product quality – graduating students – put out by the for profit colleges. These companies were drawing up to 90 percent of revenues in the form of federally guaranteed student loans. Claims against the for-profit education companies included enrolling students who were not qualified to receive a federal student loan, lower graduation rates and higher levels of student loan defaults than from students who went to traditional universities. The U.S. GAO launched an undercover operation in October 2010, which found about half the online programs of 15 for-profit colleges targeted were in some form of violation of federal student loan rules or standards.
Through this meltdown of the for-profit education sector, Strayer's share price went from over $250 per share in the spring of 2010 to a recent low of about $70 in October 2011. Note that the share price was still above $140 in July 2011. Since the October low, Strayer has recovered to about $110 per share. In 2011, the company reported new student enrollment declined by 19 percent compared to 2010 and total student enrollment declined by 4 percent. Projected net income for the year of $8.83 per share is 9 percent lower than the $9.70 earned in 2010. Actual fourth quarter and year-end results will be released on Feb. 16. The Wall Street consensus estimate for 2012 is $7.09 per share, a 20 percent drop.
On the third quarter earnings conference call Strayer CEO Robert S. Silberman discussed the company's business plan for 2012. The major points of the plan are:
- Opening eight new campuses in 2012 to bring the company total to 100 by the end of the year. Revenue growth is still dependent on enrollment growth.
- Increase tuition rates by 3 percent instead of the company's traditional 5 percent. This concession is made due to the continuing employment recession in the U.S.
- Maintain the dividend at the current $1.00 per share quarterly rate. Strayer currently yields 3.5 percent.
- The board of directors authorized an increase in the share buyback authorization to $100 million, or at the current share price about 7 percent of the outstanding shares.
At the beginning of 2011, management forecast the company would earn $7.50 to $7.70 per share for the year. The actual results handily exceeded those expectations, with final 2011 earning to be over $8.80 per share. Strayer management is committed to return to a pattern of growth through organic means, increasing campuses and number of students enrolled along with annual tuition increases. The largest threat to growth is that the company brings in 75 percent of revenue from federal student loans. A negative change by the federal government concerning student loan programs could severely change the Strayer prospects.
A final interesting note on Strayer and Wall Street analyst rankings. At the first of the year 2012, the analysts from Piper Jaffray cut their target price to $91 from $98 on Strayer. The interesting point is these analysts reiterated their neutral rating with the current stock price at about $93. Did you ever wonder what it takes to get a sell rating out of Wall Street? Plus the stock made a nice 20 percent run up in the two weeks following the downgrade. Maybe that is what neutral means!
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