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Strategic Education: Acquisition Raises Intrinsic Value, Strong Buy

Mar. 01, 2021 5:31 AM ETStrategic Education, Inc. (STRA)46 Comments
Equanimity Investing profile picture
Equanimity Investing


  • Strategic Education made an acquisition that will inherently boost ROIC, which will significantly benefit long-term shareholder value.
  • Shift from physical locations to virtual education should buoy margins.
  • Capital structure should maintain relatively low leverage and free cash flows should accelerate to record highs by next year.
  • STRA could reasonably be worth $150/share within the next few years.

Investors lost their minds when Strategic Education (NASDAQ:STRA) announced that it would be acquiring Laureate Education, Inc.'s Australian college assets for $642 million, which represented essentially all of the company's accumulated cash and equivalents, as some believed such a build-up would be used for capital return to shareholders. As a result, the stock sold off from about $160 to ~$90 within the span of a couple months, or a 44% share decline. Fortunately, however, management made the inherently right decision for long-term shareholders by acquiring high-quality assets, which have higher education curriculums within job markets that have secular growth and longevity, particularly outside the U.S. which diversifies their asset portfolio and currency risk, as well as provides more stability to quarterly cash flow.

On the surface, investors and Wall Street analysts thought that the acquisition multiple ran well beyond what their own business was valued for, but management disclosed that claim was baseless. When digging deeper, it turns out that STRA bought these assets for only 14.5x 2020 pro forma adjusted EBIT, but when factoring the growth potential and the opportunity to create cost synergies as have been done for Strayer and Capella University, I think what we'll find is that these assets were likely acquired for much less, perhaps even for a high-single-digit multiple when considering the exit cash flow potential. The company disclosed access to its credit revolver:

"The Company has received commitments from SunTrust and Bank of America to expand the Company’s existing revolving credit facility from $250 million to $350 million coinciding with the close of the transaction."

But frankly, I believe that management will stick with its historical playbook and keep debt close to zero as there's no need to carry the interest burden.

That said, I firmly believe management bought these assets with the intention

This article was written by

Equanimity Investing profile picture
Equanimity Research helps you focus on protecting your principal and thinking long-term with your investments. I'm long treasuries, select high-quality companies, and will never use margin. As a generalist, I cover multiple sectors with a dividend and non-dividend long-only stock strategy over a 5-10+ year investment horizon. I also cover macroeconomics regarding monetary policy and excessive debt levels globally.All articles/blogs are for informational and entertainment purposes only. Under no circumstances should any of these articles/blogs or any published information be interpreted as investment advice, or as an offer to buy/sell any financial security. Perform your own due diligence. I welcome comments and corrections of all kinds.

Analyst’s Disclosure: I am/we are long STRA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I may purchase additional shares in $STRA in the coming days/weeks.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (46)

PriceVsValue profile picture
Insiders are buying
Thomas Richmond profile picture
Thank you for sharing.
Flex68 profile picture

Down 11% since the article was written, down 25% over 1 year, and down 53% since July 24, 2020.....

when does the bleeding stop?

Plenty of resistance points, but is $70.81 - $70.84 really support?
TLCVI profile picture
Possible Points for STRA’s Approximate 104 Stockholders to Raise with Management:
1. What is the reason behind the continuous segment reorganisations and classifications that have taken place in recent years? (Be honest please).
2. With regards to CEC, following the segment reorganisation and considering the overall net loss for the year ended December 31, 2018, how is it that the timing of the operations allocated to STRA actually turned into income (not a loss) from operations, and if so how was this achieved?
3. Where are the depreciation and amortization expenses accounted for in the income statement?
4. What are the ‘other’ assets included in the ‘other current assets’ and ‘other assets’ portion of the balance sheet?
5. Can the exact estimated useful lifetimes of all asset classes be provided? Why are they not currently provided?
6. Why were the capital expenditure projections changed from absolute values to percentages of revenue?
7. The amount deferred for estimated redemptions earned under the Graduation Fund increases every year, why is it constantly increasing and at what point does this become a concern?
8. Can any information be provided on the industry regulations in Australia and New Zealand?
9. Why were the payments for the assets supporting the operations of the Jack Welch Management Institute deferred for so long?
10. Can the Company explain their commitments to invest in certain partnerships through 2027?
11. Prior to the Company’s acquisition of Capella Education Company the line “there are no pending material legal proceedings to which the Company is subject or to which the Company’s property is subject” [11, 13, 15, 17, 19], had existed since the 2013 10-K filing. Is this still currently the case?
12. Can the Company explain the change in course fees over the last fiscal decade?
13. Is the Company planning a big share purchase operation anytime soon?
14. Why have advertising costs been consistently rising and does Management think they are seeing a good return on this investment?
15. The Company continually mention their ability to have detect fraudulent activity in the past and the occurrences isolation, but exactly what instances are they referring to? Can full details be provided?
16. In what year was Capella University founded and why do different reports cite different years?
17. Can the Company provide any kind of update on their previously mentioned initiatives such as Strayer@Work and the SEI Venture and can they do so going forward for all other initiatives they are going to mention in the 10-K filings?
18. Why has there been committee re-shuffling in the last few years?
19. “Mr. Wargo was not nominated for re-election at the 2019 Annual Meeting of Stockholders” [6]. Why?
20. Why did the Vice Chairman, resign as an executive of the Company but remain as a non-employee Director on August 1, 2019?
@TLCVI.com I think it's important to ask questions and some of these definitely can use addressing (e.g. Mr. Wargo nomination). But some of these questions' answers are readily available with a Google search (e.g. year Capella was founded and multiple dates reported) and some other questions are not answerable (e.g. "exact" useful lifetimes of all assets).

No intention to to argue; just sharing what I think.
Flex68 profile picture
@HULRe ,

Reckon the questions were, basically, 'rhetorical?'

Oh, but quite pertinent! lol
Update after Biden's American Family Plan proposal: As I shared previously, I think STRA will face long term headwinds due to the Biden's admin.'s stance on education. In particular is if the 2 years of free community college materializes.

STRA knows what's coming and they're adjusting. Sophia, partnerships with corporations, adjusting so students can enrol anytime of the year (instead of 4 intakes), etc. It is still well managed.

However I cannot envision a scenario where their income will not be negatively affected, and, where investors remain dovish for the duration of the Biden administration adding further drag (i.e. lower multiple, it will be out of favour). This I believe is not a negative; it should allow a good comany facing stiff headwinds to possibly be had at a good price.
Flex68 profile picture
Down nearly 50% in a year....

Down dooby doo down down
Comma, comma, down dooby doo down down
Comma, comma, down dooby doo down down
Breaking up is hard to do
Flex68 profile picture
Down on an up day;
down over 5 days;
down over 1 month;
down over 6 months; and,
down massively over 1 year.

Support level....?
18 Mar. 2021
Some are so bullish, others so bearsish. The truth is simple though. One or two main factors typically affects most stocks in the grand scheme of things. With STRA the main factor is regulation; how much and when.

Dissecting regulation a bit further, it comes to 3 main points:
1) Closing the 90/10 loop hole of federal funding
2) Bringing back a version of Obama's "Gainful employment rule"
3) Free 2yr college as promised by Biden

STRA has avoided high risk growth and the first two points will not affect it significantly, they've been prudent. The third point however is often missed by MOST investors. Once COVID is dealt with, there's a real risk of Biden Admin. focusing on bringing some sort of free education for all.

If I was a student, would I rather go for 2 free years of education, or pay for 4 years at STRA? Simply put if this does happen, STRA's top line will be affected with less student attendance, and, their bottom line will be affected due to lower operating margin. Under such a scenario we'd need to guess what earnings would be like (20, 30, 50% lower?)

So if you feel there's no chance of free education, this stock is likely underpriced. If you believe some form of free education is on the horizon, there's room for more downside. And that's all there is to this one, in a nutshell.
Equanimity Investing profile picture
@Maithem Mahdi Effectively, government is subsidizing school programs for "free education". Which schools qualify and which ones don't? Who's to say that STRA wouldn't qualify for this program? STRA's goal has been to be as affordable as state run schools, and much cheaper than private education.
@Maithem Mahdi Good points, but I'm not sure these are the only factors. For example, STRA is attempting to shift its mix over time, boosting students sponsored by corporate continuing education programs.
Equanimity Investing profile picture
@Corneroffice Yes, it is a core strategy that will only produce better outcomes for students.
Hillandale Advisors profile picture
Good write-up! Big sellers but insider buying. Great ROTC but with stronger economy maybe more choose work vs STRA?
Guraaf profile picture
@Hillandale Advisors Economy is not strong. EPS is less than $4.
Flex68 profile picture
@Hillandale Advisors ,

Insider buying non-existent between 2018 , and current , except for a purchase of 4k shares ($310.5k) by Silberman on 3/3/21.

Not quite what I'd consider an illustration of confidence, but better than zero purchases, I guess.

Far more telling is the fact that one has to go back to 2018 to see institutional buying be very impressive, and the institutional selling over the TTM has slightly favored the Sell......
bigdawg4444 profile picture
T Rowe Price owns around 10% of the shares of this company in some of their most stellar funds. This is all I need to know that the investment has some merit. Not too many companies trade 60% below their 52 wk high. Just added to position at 79.
Flex68 profile picture
Author disclosed he is long, and opined that "STRA could reasonably be worth $150/share within the next few years" (though he did not really substantiate).

SP of 11/1/19 at $123.56
SP of 7/17/20 at $164.46
SP current of $79.71


November 12, 2020 to February 26, 2021 SP dropped 12.3%
February 26, 20201 to March 2, 2021 SP dropped 5.52%


EPS(2020) $6.82
and a forecast EPS(2021) $6.08

(Trailing P/E of 12.8 vs/ a Fwd P/E of 14.3)

And 8 analyst opinions between 2/5/21-3/2/21, with 7 as Neutral

Sure glad that I'm not long STRA

(but will admit that current negative momentum and SP commands some attention)

I want to see a little positive change in momentum, MACD, RSI, SMA before I dip my toe in the water, tho....

But thanks to author for putting it on my radar
Guraaf profile picture
@Flex68 GAAP earnings are only $3.77.
Flex68 profile picture
@Guraaf ,

I really wasn't sure what your point might be in offering that GAAP does not meet non-GAAP.....when does it ever?

But then you also responded to @Hillandale Advisors to indicate "Economy is not strong."

Whose economy?
And what point(s) are you attempting to make??
Guraaf profile picture
@Flex68 US economy. GAAP never meets non-GAAP but when the gap is large then worth looking further and trying to use GAAP as much as possible especially if year-on-year the difference is large, i.e., not a one-time hit to GAAP earnings.

$STRA story is weak. In a weak economy, people will not continue to take more loans to study at for-profit colleges and STRA will not generate revenue and earning growth in coming 5 years and should be valued accordingly. Over-priced above $60.
Guraaf profile picture
Finally the stock is responded. I had shorted it earlier and now getting closer to $75 when I will close my short. I think it will go lower to $60 levels all said and done though.
Equanimity Investing profile picture
@Guraaf If the stock moves into the $60s, I will likely triple my position.
@Equanimity Investing what is your position looks like?
Guraaf profile picture
@Kamrul6 I am going to close my short just around $74, I think. There is nothing left in this stock.
Risk0 profile picture
good note.
id like to buy but what about the possibility that the democrats potentially limiting private education? perhaps u could address this issue which likely is constraining the share price?
@Risk0 Yes, its a good company but the impact of any new legislation (free community college, student aid for profit schools etc) makes it risky.
Equanimity Investing profile picture
@vinvestor105 Tuition free college is a pipe dream, at least for quality education. There have been proposals, but that would cause additional breaks in the economy. I'm entirely for affordable education but if college becomes "free" the taxpayer is picking up the tab, and by the way, how are educational institution employees paid? What's stopping admins and teachers from steadily increasing their salaries, does that require additional regulations and government enforcement? Talk about a waste of time, effort, money, and presenting more potential conflicts of interest. That said, there's plenty of free education on the internet, but you have to create your own curriculum and do the work - it takes discipline, many people don't have it.
Risk0 profile picture
@Equanimity Investing ty for taking the time to respond to my concern & @vinvestor105 response. Not making a judgement politically but it seems as though current Gov intends passing a lot of bills which depend upon money. Hence the bond market mini collapse.

Moreover, is the education of this group the best? i see their marketing power, but I'm not seeing teh college as one of the best academically. If that's right, then once there is free alternative, perhaps it may take people away.? Of course, now they've got Ozzie as alternate stream, but one should consider the possibility.
Not quite the same business, but I prefer LINC.
I largely agree with your thesis and own a position acquired around 95. But did the enrollment numbers in the most recent quarter concern you?
@Corneroffice that is what worries me too,
You might think in a business so focused on the online learning a pandemic should help increasing the students
Equanimity Investing profile picture
@Corneroffice They were weaker than expected but this has happened before where STRA will have consecutive prints of weak enrollments, whether its macro-economic related, competition, brand perception, etc. but their programs have been proved to be resilient and things can suddenly turn constructive. I think one issue at play is a difficult labor market, but management has been through these cycles before and they are investing in their employees and software infrastructure.

I'm not dismissive of this enrollment weakness, but at the same time, I think it could be resolved by the end of 2021.
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