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STRA - Strayer Education

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klarmanite:

I'm thinking there's value in several for-profit names long term. The short interest in some of these names is staggering. The main points of my STRA write-up are summarized below. Go to my website to see the full write-up: www.klarmanite.com/write-ups


ELEVATOR PITCH - STRA US Equity

•       We’ve seen this before: an industry temporarily perceived as broken with investors fleeing the stocks en masse because of fear of regulatory changes. Remember Macondo? In 2010, there were days where there was literally no bid side in high quality driller names like Seadrill (SDRL), which subsequently rose well over 100%. I believe the same sort of buying opportunity is present in quality for-profit education stocks today.

•       The regulatory bear case for non-profits was accurate, but has played out to a large extent. More recently the bear case seems to have shifted to a perception of increasing competition.  I think the impact from non-profits and MOOCS will probably not be as substantial as many fear. Consensus opinion seems to be that competitive pressures and regulation has led to irreversible enrollment declines in the for-profit industry, but the evidence suggests a (natural) cyclical downturn after a boom period and elevated long term unemployment is to blame. That is a much less dire situation, since long term demand for higher education in the US looks healthy.

•       Underestimated and deeply out of favor company with short interest currently > 30% of float. Expectations really are incredibly low: A reverse DCF with a 10% discount rate, 0% forecast period growth over the next ten years and 0% terminal growth for another 10 years yields 46 USD. Comparing that with today’s price of 43 USD, we can safely say that Mr Market is not optimistic when it comes to Strayer’s future.

•       STRA is dirt cheap based on normalized earnings power and cash flow metrics. My estimated fair value of STRA is 72% higher than today’s price of 43 at 74 USD. I base this on the average of a DCF valuation, an EPV (Earnings Power Value aka “no growth” valuation) and the likely value of STRA in a buyout scenario.

•       Strayer has best-in-class management and its new graduation fund program will improve its value proposition while at the same time strengthening its competitive position.

•       Increased regulation and oversight will benefit the more serious players like Strayer longer term by creating increased barriers to entry, and put the diploma mills out of business. I think Strayer is the best for-profit play going forward because it has both cost advantages from scale, several recruitment channels that do not depend on aggressive marketing, a high percentage of degree students which bring more recurring revenue streams  and a reputation for quality (as far as for-profits go) – a potent combination.

Feedback on my thesis is appreciated.

/K

constructive:

--- Quote from: klarmanite on August 25, 2013, 01:04:17 PM ---The regulatory bear case for non-profits was accurate, but has played out to a large extent.

--- End quote ---

There's two parts to the regulatory bear case, right? Accreditation and federal loan access. How does STRA score on those?

Are the comments here accurate? http://wiki.answers.com/Q/Is_Strayer_University_an_accredited_online_school

It seems like the regulatory issues are ongoing, not played out yet: http://www.politico.com/story/2013/08/for-profit-colleges-fear-another-attack-95097.html

ASTA:
My question is why invest in a general for profit university. Instead buy a specialized one like coco or linc as the future for nurses and other specialized trades hands it self as being the most competitive against traditional schools.

mcliu:
Earnings seems like it's going to take quite a hit over the next two years. Enrollment and tuition are dropping quite rapidly. Shouldn't you factor in negative growth in your DCF?

jschembs:
I would agree with ASTA. I owned LINC off and on during the past year, but ultimately sold because I just don't like the fact these entities are so heavily reliant on subsidized financing. I believed LINC had a differentiating characteristic focusing on training for blue collar trade jobs, where the results should be more tangible and applicable to specific jobs after graduation, and they are not competing against the amorphous bachelor's degree with minimal applicable skills. Most people attending for-profit schools (and many attending the more traditional not-for-profits, as well) graduate with degrees like marketing, business administration, communications, political science, et cetera, which provide little preparation for relevant careers. I think both types of higher education face serious headwinds as increasingly question the value provided versus the incessantly rising costs.

The economics of for-profit institutions are incredible. High returns on invested capital, minimal fixed and working capital requirements, and (for much of their histories) a consumer backed by taxpayers. These returns are only as good as the financing offered by the U.S. government, however, and my worry is the government decides to implement a payment structure that forces lower ROICs across the industry. I'm probably giving the government far too much credit, but this doesn't seem to be an industry that should consistently earn ROICs so far above other industries.

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