Strayer Education Stays Neutral

We have maintained a Neutral recommendation on Strayer Education Inc. (STRA - Analyst Report) following appraisal of first quarter 2012 results.

Strayer Education’s first quarter 2012 earnings of $2.09 per share were in line with the Zacks Consensus Estimate, but plunged 25% from $2.80 in the year-ago quarter due to revenue declines. Revenues dropped 13% to $149.5 million due to lower enrollments in the quarter.

Total enrollment at Strayer University for the 2012 spring term declined 9% to 50,896 students. While continuing student enrollments declined 13%, new enrollments were up 12%. The new enrollment growth is encouraging, especially in the context of declines suffered by most of its peer companies.

Strayer Education provides post-secondary education through its wholly- owned subsidiary, Strayer University. It is focused primarily on working adults in traditional classroom courses as well as online. The company offers convenient weekend and evening courses, which are well suited for the work-day schedules of working adults.

Currently, these mid-career professionals are apprehensive of going back to school due to the difficult overall market environment. But once the stringent regulatory environment and overall economic conditions stabilize, working adults will seek additional education to secure better jobs or to advance their careers.

We are encouraged by Strayer’s strong brand position and its geographic expansion strategy of opening new campuses every year, both in new states and markets. Strayer has grown from eight campuses in one state in 1996 to 92 campuses in 23 states in the U.S. In fiscal 2012, the company plans to open 8 new campuses. The company’s enrollment in new campuses jumped 25% in the first quarter of 2012. We believe that the company’s geographic expansion strategy will drive further enrollment growth, going forward.

The company’s convenient evening, weekend and online courses attract corporate alliances and community college articulation agreements. Currently, the company has employer arrangements with both private and government organizations like Capital One (COF - Analyst Report), Department of Health and Human Services, Federal Bureau of Investigation, McDonald’s (MCD - Analyst Report), Starbucks Corporation (SBUX - Analyst Report) and many more. Strayer’s corporate alliances give it a competitive advantage and contribute significantly to growth.

The community college articulation agreements allow for credits and degrees earned at partner institutions to be transferable to a related Strayer University degree. These agreements usually bring students who finish with strong outcomes.

On the flip side, new enrollment growth notwithstanding, the company continues to suffer from a difficult regulatory environment as well as weak student demand. The company has been witnessing a decline in enrollments over the last 18 months due to continued unemployment, the overall economic downturn and a related decline in student demand due to lower confidence in job prospects. We thus prefer to remain on the sidelines until we see substantial enrollment growth and improvement in the overall industry outlook.