(STRA) Strayer Education Analyst Remains Neutral on Shares

A rich legacy of more than 119 years coupled with a strong focus on working adults has enabled Strayer Education Inc. (STRA) to establish a healthy position in the for-profit post-secondary education industry. The company has been consistently focusing on expanding educational programs, and is in the midst of a rapid expansion plan and expects to open 8 new campuses in 2011.

Strayer Education recently posted better-than-expected first-quarter 2011 results. The quarterly earnings of $2.80 per share beat the Zacks Consensus Estimate of $2.67 and jumped 6% from $2.65 earned in the year-ago quarter due to the fall in share count on account of a share buyback.

Total revenue for the quarter came in at $172 million, marginally ahead of the Zacks Consensus Estimate of $171 million, and grew 9% from the prior-year quarter, buoyed by a rise in enrollment and a 5% increase in tuition fees, effective January 2011.

The educational institute said that total enrollment for the 2011 spring term was 55,974 students compared with 55,970 in the same term last year.

Strayer Education is a prominent player in the for-profit post-secondary education industry. The company’s sustained effort to expand educational programs and to open new campuses has helped boost enrollment and, in turn, the top-line.

However, the current potential risk looming over the education sector is the regulation proposed by the Department of Education that may weigh upon students enrollments and the company’s profits. The Department of Education proposed that an educational program could only qualify for Title IV funds, if it helps in achieving gainful employment, which includes the criteria of loan repayment rate and debt-to-income ratios.

The company derives a major portion of its revenues from federal student financial aid programs, the Title IV programs. The education institutions are also under the scanner due to the rise in the default rate of student loans.

We observe that Strayer Education is witnessing a fall in students’ enrollment. After increasing 4% in fourth-quarter 2010, the company witnessed a drop of 0.1% in campus-based students in first-quarter 2011. Moreover, the rate of growth in online students falls to 1%, following a 10% increase in the previous quarter. The company also informed that new student enrollment dropped 19%.

Another for profit education company, Capella Education Company (CPLA) cautioned that new enrollment in second-quarter 2011 is expected to tumble by 40%. To counter sluggishness in students’ enrollment, education companies are resorting to restructuring their cost base.

Capella said that it lowered its headcount by about 120 non-faculty workforces and incurred a charge of about $1.9 million for the same in the quarter. Management hinted that the eliminations will result in cost savings of approximately $12 million to $12.5 million per year.

Currently, we have a long-term ‘Neutral’ rating on the stock. Strayer Education, which competes with Apollo Group Inc. (APOL) and Corinthian Colleges Inc. (COCO), holds a Zacks #3 Rank, which translates into a short-term Hold’ recommendation that correlates with our long-term view.

APOLLO GROUP (APOL): Free Stock Analysis Report

CORINTHIAN COL (COCO): Free Stock Analysis Report

CAPELLA EDUCATN (CPLA): Free Stock Analysis Report

STRAYER EDUC (STRA): Free Stock Analysis Report

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