(STRA) Strayer Education Beats The Street – Enrollment Falls

Strayer Education, Inc. (STRA), a for-profit education company, recently posted third-quarter 2011 results. The quarterly earnings of $1.20 per share beat the Zacks Consensus Estimate of $1.06 but plunged 30% from $1.72 in the year-ago quarter.

Total revenue for the quarter dropped 8% to $135.9 million from the prior-year quarter, attributable to a fall in enrollment, partially offset by an increase in tuition fees, effective January 2011. Total revenue also fell short of the Zacks Consensus Estimate of $138 million. In order to check waning revenues caused by falling enrollments, Strayer Education plans to implement a 3% hike in tuition fees with effect from January 2012.

Operating income for the quarter plummeted 36% to $24.4 million, whereas, operating margin contracted 790 basis points to 18%.

Let’s Unveil the Picture

The educational institute, which offers degree programs in business administration, accounting, information technology, education, health care, public administration and criminal justice, said that total enrollment for the 2011 fall term declined 11% to 54,233 students. The company informed that total campus-based students fell 10% to 49,017 and online students slipped 15% to 5,216. The company informed that new student enrollment plunged 15%.

The potential risk looming over the education sector is the regulation proposed by the Department of Education that may weigh upon students’ enrollment 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.

Another for-profit education company, Capella Education Company (CPLA) cautioned that new enrollment in fourth-quarter 2011 is expected to tumble by approximately 10%. To counter sluggishness in students’ enrollment, education companies are resorting to restructuring their cost base.

Campus Openings

Strayer Education recently opened three new campuses, two in Chicago, Illinois and the third campus in Dallas, Texas. The company plans to open 8 new campuses in fiscal 2012.

Other Financial Details

Strayer Education ended the quarter with cash and cash equivalents of $57.1 million, total term loan of $100 million and shareholders’ equity of $43.8 million. During the first nine months ended September 30, 2011, the company generated $122.7 million in cash from operating activities and incurred capital expenditures of $24.9 million.

During the first nine months the company bought back 1,370,000 shares at a price of $133.32 per share, aggregating $182.7 million. As of September 30, 2011, Strayer Education had $25 million at its disposal under its share repurchase authorization, which the company raised to $100 million.

Strolling through Guidance

Strayer Education, which owns Strayer University, said it now expects fourth-quarter 2011 earnings between $2.24 and $2.26 per share based on the enrollment for the 2011 fall term. For fiscal 2011, it projected earnings between $8.82 and $8.84 per share.

For fiscal 2012, management provided separate projections based on students’ enrollment. Strayer Education hinted that if new enrollment drops by 10% and total enrollment falls by 9% compared with fiscal 2011, it will result in revenue of $570 million and earnings of $6.00 to $6.20 per share. On the contrary, if new enrollment jumps by 10% but total enrollment drops by 3%, it will result in revenues of $610 million and earnings between $7.80 and $8.00 per share.

Management also highlighted that if new enrollment remains flat and total enrollment tumbled 6%, it will result in revenue of $590 million and earnings between $6.90 and $7.10 per share.

Zacks Rank Defining Neutral Stance

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 that translates into a short-term Hold recommendation and correlates with our long-term view.

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