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Neutral on Strayer Education

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

Strayer Education’s second quarter 2012 earnings of $1.85 per share missed the Zacks Consensus Estimate by a penny. It plunged 27% from the year-ago quarter due to revenue declines. Revenues fell 11% due to decline in enrollments and revenue/student in the quarter. Total enrollment at Strayer University for the 2012 summer term declined 7% to 44,236 students. While continuing student enrollments declined 11%, new enrollments were up 9%. The company’s new enrollments have increased for two consecutive quarters, which is encouraging considering declines at most 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 professional 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 sates and markets. Strayer has grown from eight campuses in one state in 1996 to 92 campuses in 23 states in the U.S. In summer term of 2012, the company opened 4 new campuses and expects to open another 4 in the latter half of 2012. The company’s enrollment in new campuses jumped 25% in the first quarter and 31% in the second 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, Department of Health and Human Services, Federal Bureau of Investigation, McDonald’s (MCD - Free Report) , Starbucks Corporation (SBUX - Free 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, no matter the growth in new enrolments, the company continues to suffer from a difficult regulatory environment as well as weak student demand. The company has been witnessing decline in enrollments over the last 18 months due to continued unemployment, overall economic downturn and a related decline in student demand due to lower confidence in job prospects. The third quarter outlook was also disappointing due to lower enrollments in the summer term, decline in revenue/student and higher expenses associated with the second half weighted campus openings. We thus prefer to remain on the sidelines until we see substantial enrollment growth and improvement in the overall industry outlook.

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