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Strategic Education (STRA) Down 15% Despite Q2 Earnings Beat

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Strategic Education, Inc. or SEI (STRA - Free Report) reported stellar results for second-quarter 2020, wherein the company’s earnings and revenues not only topped analysts’ expectations but also grew from the year-ago level. The uptick was mainly backed by strong top-line numbers, and margins in Strayer and Capella universities.

However, shares of this for-profit education company declined 14.8% on Jul 29, following the earnings release. Probably, a tepid view for the third quarter — precisely for Strayer — impacted investors’ sentiment.

It reported adjusted earnings of $2.06 per share, which surpassed the Zacks Consensus Estimate of $1.66 by 24.1% and increased 29.6% from the year-ago quarter.

Total revenues of $255.8 million also surpassed the consensus estimate of $246 million by 4%. Notably, the reported figure also grew 4.4% from the prior-year level.

Strategic Education Inc. Price, Consensus and EPS Surprise

Strategic Education Inc. Price, Consensus and EPS Surprise

Strategic Education Inc. price-consensus-eps-surprise-chart | Strategic Education Inc. Quote

Segment Details

SEI currently operates in two reportable segments: Strayer (accounting for 54% of total second-quarter 2020 revenues) and Capella (46%).

Strayer University: Strayer University’s revenues grew 4.8% year over year to $138.1 million due to higher enrollment. Total enrollment also grew 6% from the year-ago level to 53,782 students. Enrollment of new students declined 4% but that of continuing students rose 8% from the year-ago quarter. The segment’s quarterly operating margin increased 740 basis points (bps) to 25.9%.

Capella University: The segment’s quarterly revenues came in at $117.8 million, reflecting 3.9% year-over-year growth backed by higher enrollment and revenue-per-student.

Total enrollment at the university grew 1% from the year-ago quarter to 39,341 students. New and continuing student enrollment both increased 1% year over year. The upside was mainly driven by improved performance of FlexPath, which comprises 37% of Capella University’s Bachelor’s and Master’s degrees total enrollment.

Its operating margin came in at 23.1% for the reported quarter, up 410 bps from the year-ago level.

Operating Highlights

Adjusted operating margin for the reported quarter was 24.6%, up 580 bps year over year. Adjusted EBITDA was $77.7 million for the reported period, up 28.9% year over year.

Financial Details

As of Jun 30, 2020, SEI had cash, cash equivalents, and marketable securities of $525.3 million compared with $491.2 million and $506.3 million on Dec 31, 2019 and Mar 31, 2020, respectively. Notably, the company had no debt. It had $250 million of undrawn credit as of Jun 30, 2020.

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The company pointed out that COVID-led unemployment impacted demand in the back half of the second quarter, which in turn hurt overall enrollment results.

Although rising unemployment level has been adversely impacting both Strayer and Capella Universities, the impact is more on the former, as this university has more undergraduate student mix, including many first-time college students.

For its summer academic term, which represents Strayer’s third-quarter enrollment, the company expects new student enrollment to be down 27% from the prior year, while total enrollment is projected to be down between 0% and 1%.

Notably, Capella focuses more on graduate education and is less sensitive to the current economic downturn. Its overall demand environment has witnessed less impact than Strayer.

Based on the current enrollment trends and cost-management efforts, the company expects both revenues and adjusted operating income to remain flat year over year in the third quarter.

For 2020, it projects revenues to be flat to up 1%. Adjusted operating income and pre-tax income are expected to be up in low to mid-single digits from the prior year.

Zacks Rank

SEI — which shares space with Adtalem Global Education Inc. (ATGE - Free Report) , Laureate Education Inc. (LAUR - Free Report) and American Public Education, Inc. (APEI - Free Report) in the Zacks Schools industry — currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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