We recently, upgraded our recommendation on Strayer Education, Inc. (STRA), a for-profit education company, to Neutral with a price target of $137.00. Earlier, we had an Underperform rating on the stock.
A rich legacy of more than 119 years coupled with a strong focus on working adults has enabled Strayer Education 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 fourth-quarter 2010 results. The quarterly earnings of $2.73 per share beat the Zacks Consensus Estimate of $2.64 and jumped 18% from $2.32 earned in the year-ago quarter.
Total revenue for the quarter came in at $172 million, marginally short of the Zacks Consensus Estimate of $173 million but grew 17% from the prior-year quarter, buoyed by a rise in enrollment and a 5% increase in tuition fees, effective January 2010.
The educational institute said that total enrollment for the 2010 winter term climbed 4% to 57,608 students. Strayer Education’s total campus-based student population also rose 4% to 51,570 and online students increased 10% to 6,038. However, new student enrollment into Strayer Education plunged 20%.
The current potential risk looming over the education sector is the regulation proposed by the Department of Education, creating an uncertainty over student enrollment trends. 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 institute, Capella Education Company (CPLA) cautioned that new enrollment in first-quarter 2011 could tumble by 35%. To counter sluggishness in students’ enrollment education companies are re-working their cost base.
Given the pros and cons we prefer to have a long-term Neutral rating on the stock. Strayer Education also holds a Zacks #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term recommendation.