Strayer Tops, New Enrollment Falls

Strayer Education, Inc. (STRA - Analyst Report), for-profit education company, recently posted better-than-expected first-quarter 2011 results. The quarterly earnings of $2.80 per share beat the Zacks Consensus Estimate of $2.67 and jumped 6% from $2.65 earned in the year-ago quarter due to the fall in share count on account of a share buyback.

Total revenue for the quarter came in at $172 million, marginally ahead of the Zacks Consensus Estimate of $171 million, and grew 9% from the prior-year quarter, buoyed by a rise in enrollment and a 5% increase in tuition fees, effective January 2011.

The educational institute, which offers degree programs in business administration, accounting, information technology, education, health care, public administration and criminal justice, said that total enrollment for the 2011 spring term was 55,974 students compared with 55,970 in the same term last year. The company informed that total campus-based students were 50,416 versus 50,478 year-ago and online students inched up 1% to 5,558. However, the company informed that new student enrollment plunged 19%.

Operating income for the quarter fell marginally by 1% to $59.2 million, whereas, operating margin contracted 360 basis points to 34.4%.

Strayer Education is in the midst of a rapid expansion plan and expects to open 8 new campuses in 2011. Till date the company has opened 5 campuses. The first three campuses opened for the winter term 2011 are located in Cincinnati and Dayton, Ohio and in Milwaukee, Wisconsin. The company also recently opened two new campuses for the 2011 spring term, one located in Indianapolis, Indiana, and the second one in Dallas, Texas.

Strayer Education, which owns the Strayer University, said it now expects second-quarter 2011 earnings between $2.36 and $2.38 per share based on the enrollment for the 2011 spring term. The current Zacks Consensus Estimate for the quarter is $2.37.

Strayer Education is a prominent player in the for-profit post-secondary education industry. The company’s sustained effort to expand educational programs and to open new campuses has helped boost enrollment, and in turn, the top line.

However, 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. 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.

Capella Education Company (CPLA - Analyst Report) cautioned that new enrollment in second-quarter 2011 is expected to tumble by 40%.To counter sluggishness in students’ enrollment, education companies are resorting to restructuring their cost base. Capella said that it lowered its headcount by about 120 non-faculty workforces and incurred a charge of about $1.9 million for the same in the quarter. Management hinted that the eliminations will result in cost savings of approximately $12 million to $12.5 million per year.

Strayer Education portrays a healthy balance sheet, and is actively managing its capital, returning much of its free cash to shareholders.

Strayer Education ended the quarter with cash and cash equivalents of $71.1 million and shareholders’ equity of $73.3 million. During the quarter, the company generated $67.2 million in cash from operating activities and made capital expenditures of $11.4 million.

During the quarter, Strayer Education repurchased 936,000 shares at an average price of $135.91, aggregating $127.2 million. As of March 31, 2011, Strayer Education had $80.5 million at its disposal under its share repurchase authorization. The company’s Board of Directors also paid a quarterly dividend of $1.00 per share during the quarter.

Currently, we have a long-term ‘Neutral’ rating on the stock. Strayer Education, which competes with Apollo Group Inc. (APOL - Analyst Report) and Corinthian Colleges Inc. (COCO - Snapshot Report), holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation that correlates with our long-term view.