Strayer Education (STRA) Shows Strength as Starts Improve - Analyst Blog

On Dec 5, 2014, we issued an updated research report on Strayer Education Inc. (STRA).

On Oct. 30, this post-secondary education services provider reported solid results for the third quarter of 2014 and raised its outlook for 2014. Also in addition to providing positive outlook for 2015, the education company expects total enrollment to turn positive in the first or second quarter of 2015 on the back of improving starts.

Quarter Details

Strayer Education's third-quarter 2014 adjusted earnings of 37 cents per share increased 23% year over year and surpassed the Zacks Consensus Estimate by 105.6%. The strong earnings were driven by operating margin expansion, an improvement in starts, lower-than-expected decline in revenue per student, and a decline in total cost and expenses.

Total revenue in the quarter fell 8% from the comparable prior-year quarter due to a decline in total enrollment and revenue per student. Total revenue however beat the Zacks Consensus Estimate by 1.98% due to improved starts.

The rate of decline in revenue per student improved sequentially. The moderating decline in revenue per student was driven by higher student retention and lower drop out rates.  

Starts improved both year over year and sequentially due to some of the initiatives taken by the company. This includes a 20% cut in tuition rates of undergraduate students for the winter term of 2014. The company also introduced the Graduation Fund in mid-2013, which offers one free course for every three programs completed successfully. These initiatives have resulted in improved starts for the last few quarters.

Operating margin rose 310 basis points due to cost saving measures. Bad debt expense as a percentage of revenues was 3.6% in the third quarter, lower than 4.5% in the year-ago quarter but higher than 3.2% in the prior quarter.

On the back of the improving trends of starts and lower expenses, the company provided very encouraging outlook for fiscal 2014 and 2015.

Fiscal 2014 Outlook

On the back of higher student retention and lower drop out rates, Strayer Education now expects revenue per student to decline below 4% compared to the prior expected range of 4% to 5% decline for full year 2014. In the fourth quarter, Strayer expects revenue per student to decline between 4% and 5%. Total enrollments are expected to decline about 2% in 2014.

Fiscal 2015 Outlook  

On the back of the recent new enrollment trends, the company expects total enrollment to turn positive in the first or second quarter of 2015. Revenues are expected to turn positive about two quarters later. Revenues for full year 2015 are expected to be flat to down 2%, better than the prior expectation of a low single digits decline. Operating expenses are expected to be flat to down 2%. Revenue per student is expected to decline 4% – 5% in 2015.  

Strayer sports a Zacks Rank #1 (Strong Buy).

Key Picks from the Sector

Some other stocks worth considering in the education sector include Capella Education Inc. (CPLA), GP Strategies Corp. (GPX) and Grand Canyon Education, Inc. (LOPE). Capella Education and Grand Canyon Education sport a Zacks Rank #1 while GP Strategies carries a Zacks Rank #2 (Buy).