APOL Apollo Education Grp., Inc.

Strayer Education, Inc. (STRA), a for-profit education company, recently posted second-quarter 2011 results. The quarterly earnings of $2.53 per share beat the Zacks Consensus Estimate of $2.39 but dropped modestly by 3% from $2.60 in the year-ago quarter, despite witnessing a fall of 17% in net income. Management hinted that the lower share count on account of share buyback cushioned earnings per share.

Total revenue for the quarter grew 3% to $163.8 million from the prior-year quarter, buoyed by an increase in tuition fees, effective January 2011 but fell short of the Zacks Consensus Estimate of $166 million.

Analysis

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 summer term fell 8% to 47,790 students. The company informed that total campus-based students decreased 8% to 43,296 and online students slipped 12% to 4,494. The company informed that new student enrollment plunged 21%.

Operating income for the quarter fell 15% to $50.1 million, whereas, operating margin contracted 620 basis points to 30.6%.

Strayer Education is in the midst of a rapid expansion plan and expects to open 8 new campuses in 2011. The company opened three campuses for the winter term 2011 located in Cincinnati and Dayton, Ohio and in Milwaukee, Wisconsin.

The company opened two new campuses for the 2011 spring term, one located in Indianapolis, Indiana, and the second in Dallas, Texas. Recently, the company announced its plan to open three new campuses, two in Chicago, Illinois and the third campus in Dallas, Texas. 

Strayer Education, which owns Strayer University, said it now expects third-quarter 2011 earnings between $1.04 and $1.06 per share based on the enrollment for the 2011 summer term. The current Zacks Consensus Estimate for the quarter is $1.36. In the coming days, we could witness a fall in the Zacks Consensus Estimate with analysts tweaking their estimates to better align with the company’s guidance range.

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’ 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 third-quarter 2011 is expected to tumble by 30%.To counter sluggishness in students’ enrollment, education companies are resorting to restructuring their cost base.

Other Financial Details

Strayer Education ended the quarter with cash and cash equivalents of $50.6 million, total term loan of $100 million and shareholders’ equity of $38.4 million. During the first six months ended June 30, 2011, the company generated $87.4 million in cash from operating activities and made capital expenditures of $18.1 million.

During the quarter, Strayer Education repurchased 434,000 shares at an average price of $127.7, aggregating $55.5 million. During the first six months the company bought back 1,370,000 shares at an average price of $133.3, totaling $182.7 million. As of June 30, 2011, Strayer Education had $25 million at its disposal under its share repurchase authorization.

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.

 
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STRAYER EDUC (STRA): Free Stock Analysis Report
 
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