Strayer Education: A Long-Term Growth Story

Strayer Education (STRA) reported its results for the second quarter of 2007, results which show solid growth in key metrics. Revenue grew 20%, net income grew 24%, and diluted EPS grew 24%. Diluted EPS came in at 1.20, beating analysts’ estimates by .06, and the company guided toward third quarter EPS of .60-.62, compared to analysts’ expectations of .51.

Enrollment trends are strong. Total enrollment increased 19%, continuing student enrollments increased 20%, and new student enrollments increased 16%. These results show that Strayer is doing an excellent job of both retaining existing students and attracting new ones. This combination of solid results in both retention and recruitment is perhaps the most important fact in the report.

A particularly attractive feature of Strayer’s operation is the range of delivery options it offers students. In addition to traditional campus-based instruction, the company has a highly developed on-line delivery system offering courses in both synchronous and asynchronous formats. The company continues to see increasing demand for its online courses. Out of area online students (those students who are not located near a physical campus) increased 19%, students taking 100% of their classes online increased 21%, and students taking at least one class online increased 22%.

The company is on track with its plan to open eight new campuses in 2007. Earlier this year, it opened two campuses in Kentucky and two in Florida. This fall, the company will open two new campuses in New Jersey, one in Tennessee, and one in Atlanta (it’s fifth in that market).

Strayer always seems to be trading at a premium multiple. This is due to a combination of factors, and the current earnings release bears this out. Strayer has strong fundamentals and a pattern of stellar operational performance. Combined with this is an attention to educational quality which sets it apart from most of the other players in the sector. A significant development along these lines is the early reaffirmation of accreditation, for a full ten-year period, by the Middle States Commission on Higher Education. This accelerated reaffirmation is a very positive signal that Strayer is in strong compliance with the necessary accreditation standards, and it eliminates the need for accreditation review which was originally scheduled to occur in 2011.

Strayer has never been involved in any way in the various financial and educational shenanigans which have plagued the sector. It has built a strong brand, and it is determined to continue building that brand through modest sustained growth. Strayer is just beginning to break out of the Southeast and the growth potential is enormous. What is so admirable about management is its determination to grow no faster than their human capital will allow. New campuses are opened only at a rate which is consistent with their ability to staff them with seasoned people in order to insure that quality does not become a casualty of growth. There is every indication, both in terms of the company’s operational strengths as well as the large and growing market of adult students, that the company can sustain a growth rate in the neighborhood of 20% for many years to come. This will almost guarantee that Strayer will continue to trade at a multiple well above its growth rate since investors are able to see clearly both the source of future growth as well as the fact that such growth will play out over a long period of time.

Disclosure: Author has a long position in STRA

STRA 1-yr chart