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Mark Vickery

Strayer Beats but Enrollment Dips

STRA DV

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Strayer Education Inc. (STRA - Analyst Report) recently posted third quarter 2012 earnings of 36 cents per share, beating the Zacks Consensus Estimate of 32 cents. Earnings were also better than the company’s expected range of 30 cents – 32 cents. However, earnings plunged significantly from $1.20 reported in the year-ago period due to top-line decline.

Total revenue in the quarter dropped 9% from the prior-year quarter to $124.3 million due to weak enrollments. Total revenue, however, beat the Zacks Consensus Estimate of $123 million.

Quarter in Detail

Strayer University’s total enrollment for the 2012 fall term declined 5% to 51,727 students. New student enrollments were up 4% year over year. However, continuing student enrollment dropped 7% due to the declining continuation rate in the quarter.

Total number of campus-based students declined 6% to 45,977 whereas global online student enrollment went up 13% year over year to 5,750. Students taking full-time online classes went down 4% during the quarter.

The company’s convenient evening, weekend and online courses attract corporate alliances and community college articulation agreements. Investment in new campuses is an important part of the company’s growth strategy. The company regularly opens new campuses every year, both in new states and markets.

Enrollment at mature campuses (71 in operations for more than 3 years) tumbled 10% to 41,527 whereas enrollment at new campuses (26 in operations for 3 years or less) grew 40% to 4,450. The company opened one new campus in San Antonio, Texas during the fall term of 2012. The company intends to open three more new campuses in rest of fiscal 2012 as a part of its plan to open eight new campuses during the year.

Operating income in the quarter plummeted 68% to $7.8 million. Operating margin contracted 1170 basis points to 6.3%. Bad debt expense as a percentage of revenues was 4.2% in the third quarter, up 40 basis points from the prior-year quarter.

Other Financial Details

Strayer Education ended the quarter with cash and cash equivalents of $45.6 million as of September, 2012, down from $48.7 million in June, 2012.

Guidance for 2012

A peer of DeVry, Inc. (DV - Analyst Report), Strayer Education expects fourth quarter 2012 earnings to lie in the range of $1.43 – $1.45 per share. Full year 2012 earnings are expected to be in the range of $5.73 to $5.75. The Zacks Consensus Estimate is pegged at $1.59 for the fourth quarter and $5.85 per share for the fiscal.

2013 Outlook

For 2013, the company expects earnings to be in the range of $5.40–$5.60 per share. There will be a 3% hike in tuition fee from January 2013 onward. However, the company expects revenue per student to remain flat in 2013, owing to a mix shift toward graduate and corporate sponsored students.  The company also expects expenses to grow 1% – 2% in 2013, owing to the costs associated with eight new campuses in 2012.

The company announced that no regular quarterly dividend will be paid in the fiscal 2013.

Our Recommendation

We are encouraged by Strayer’s strong brand position and its strategy of opening new campuses every year, both in new states and markets. Further, the company’s corporate alliances give it a competitive advantage and contribute significantly to growth. On the flip side, the company continues to suffer from a difficult regulatory environment as well as weak student demand. We prefer to stay on the sideline given, its declining enrollment and weak guidance of 2013.

Currently, Strayer Education carries a Zacks # 4 Rank in the near term (Sell rating). We have a Neutral recommendation on the stock.

 

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