Strayer Education: High Price for a High Quality Investment

As I noted in my discussion of Strayer Education’s (STRA) recent earnings report, the stock has always commanded a very high multiple (currently 39) due not to an unusually high growth rate, which is in the 17-20% range, but rather to the excellent prospects that its current level of growth may well continue for well beyond the five-year period often used to value growth stocks. I’d like to take a look at some valuation considerations which might give at least some indication of the reasonableness, or lack thereof, of the current price.

The stock stands at 158.31, having risen 15% following the earnings announcement. On a trailing twelve month basis, diluted EPS is 4.05 giving a PE of 39 and a PEG of approximately 2.1. The market cap is 2.3B and the enterprise value is 2.13B. On a TTM basis, revenue stands at 290.1M giving an enterprise-value-to-revenue ratio of 7. Owner earnings (defined as net income plus depreciation and amortization minus maintenance capex) is 58.5M on a TTM basis giving an enterprise-value-to-owner-earnings ratio of 36 and (EV/OE)/G = 1.9. Certainly, if one considers only these ratios, the stock looks very expensive.

Let’s see what kind of results we get from a DCF calculation where we model various growth scenarios for the company. These calculations assume a growth rate of 18%, a terminal growth rate of 3%, and a discount rate of 11%. If we assume a growth period of only 5 years, we compute a fair value of 106.25. If growth can be sustained for 10 years, the fair value becomes 164.38. With 15 years of growth, the figure becomes 243.30.

The main issue in valuing Strayer is one’s assessment of the number of years during which current growth levels can be sustained. Given that the company is opening new campuses at the rate of only 8 per year, and given the fact that it is only just beginning to break out of the Southeast region, there is good reason to believe that current growth levels can be sustained for a long period.

My personal investment thesis for Strayer is based on my view that the company is well-poised to easily sustain such growth for 10 years and quite probably longer. If I’m right, the current price, lofty as it appears, is not unreasonable. I’m not buying at this price, but I’m also not selling. Strayer’s price tends to drift downward after these large earnings-related spikes. I will be looking to add to my position if the price approaches something in the neighborhood of $140.

Disclosure: Author is long STRA