Disclosure: I do not own Strayer (STRA)
Let me introduce you to a business that currently has finely tuned operations, Strayer, Inc. During my analysis covering the educational services sector, Strayer had turned up as one of the companies I was interested in as a possible investment. Unfortunately it has taken me an extended amount of time to run through Strayer’s 10k’s, earnings calls, and 10Q’s. There is a lot of good meat packaged into the company’s reports, and for good reason. If you ran a successful business with high operating margins, good fiscal responsibility, and a product offering that shows continuous double digit growth in both top line revenues and student enrollments, you are going to want to show that off and package every single detail into the quarterly and annual statements. It has been somewhat gut wrenching to watch the company’s stock price make a 35% move to the upside since April.1st, while I have been digging through the company’s details. It is like watching those happy smiley Toyota Prius drivers and realizing you were too busy last year analyzing whether buying a car like that made sense. Now you want it, but you have to wait in line for several months and must pay the full premium.
What does Strayer do?
Strayer is a for-profit university that was founded in 1892. Its main focus is around serving educational programs for working adults that will allow them to pursue degree programs ranging Bachelors to the Masters level. Campus locations run along the eastern United States, while also serving online educational programs. Current enrollment levels run just above 37,000 students based on the most recent quarter ending March, 2008.
Strayer's Strategy
Strayer’s bread and butter come from the working adults segment, by structuring classes and online programs so that students can position their courses around their work schedules. The company does not see local community colleges as competitors, but rather as partners. They have structured these partnerships with over 100 community colleges that will allow those students graduating with a 2 year diploma to enter in a full Bachelor’s program in the 3rd year at Strayer. The company’s strategic focus centers on [1]:
- Maintaining stable enrollment in the mature markets. The company currently has 57 campuses.
- Opening new campuses where there is demand. 9 new campuses are scheduled to open in 2008.
- Expanding online education and improving the curriculum online.
- Develop corporate relationships to establish corporate training and degree programs.
- Optimize shareholder value through stock buy backs and dividend payments.
Execution and Strategy
Operational and strategic performance has resulted in impressive financial performance. Some of Strayer’s strategic moves [1]:
- Online education grew 25% to 4000 students for the 2007 fall term. The company is looking to revamp their online curriculum starting with new economic and accounting courses.
- 17% increase in total student enrollment to 36000 students (half of these students took courses online)
Retaining financially sound students:The company has performed well to defend against the recent student lending problems. The company’s target towards the adult working segment has helped deflect it against some of the private lending problems other schools have faced. 61% of the school’s students are over the age of 31 [3]. This paired along with their partnership programs with local community colleges to offer full bachelor’s program to 2-year community college graduates acts as a filtering system to weed out financially risky students.
Controlled Expansion:The company has no long term debt and places emphasis on expanding Strayer’s operations only when there is enough capacity to handle growth. The CEO’s (Robert Silberman) main focus is to ensure academic quality does not suffer.
The company has been able to expand through campus expansion while still keeping capital expenditures capped at just over 5% of total revenues over the last 5 years. This highlights good fiscal responsibility, part of which is driven by the company’s decision to undertake leases rather than buying real estate. The company only owns 5 of their 57 campuses. This allows Strayer to spin up new locations while also removing underperforming campuses rather quickly. Compare this with DeVry which has had to divert some of their attention to offload real-estate, which is not a core strategic function [9]. The company is looking to expand in 2008 by 9 campuses.Each new campus requires approximate $1 million up front for leasehold improvements, and capital equipment. The company’s campus expansion model assumes [2]:
- $1 million incurred loss in the first year of operation for a new campus
- Income generation comes in 4-6 quarters after operation.
- Student enrollment growth is targeted to grow 100 to 150 students per year until 1000 students are reached at which point the company estimates an Internal Rate of Return (IRR) of 70%.
Any investment that garners an IRR approaching 70% is phenomenal. Strayer’s challenge now becomes sustainability over the long term, specifically expanding nationally. The company has stated it has enough free cash to continue opening new campuses for 12 months (through the end of 2008).
What a new campus brings to the bottom line:In order to get a rough idea of how much each campus would bring to the company’s bottom line over a 10 year period, we can break down the tuition by the company’s historical cost structure. The company currently charges approximately $14,000 a year in tuition for a typical 4 year Bachelor’s program. Breaking this out based on the company’s past 5 year operating history we have the following allocation for a single student:
Strayer currently assumes for each new campus they will grow students at 100 to 150 students per year until 1000 students are reached. If we take a conservative acquisition of 100 students per year, each bringing in $3,046 in profit, the following forecast can be made for each year of operation once a new campus opens:
The present value of all those future profits today comes to roughly $5.8 million for one campus opening. Nine new campuses are scheduled to open in 2008, resulting in a present value of $52.2 million to Strayer’s bottom line if they continue to execute. Not bad at all.
Exiting the loan origination business:The company has decided to exit the loan origination business by closing down its wholly owned subsidiary Education Loan Processing, and move more towards Title IV government backed loans through 3rd party lenders. Approximately 65% of the company’s revenue stream comes from Title IV, and 25% from student’s employers [4].
The high exposure to Title IV should not be of concern this year as the government recently has stepped in to buy up securities backed by student loans [5].
Title IV default rates at Strayer have historically run very low, under 5% in the years 2003 to 2005. Private loans accounted for only 3% of revenues in 2007, with 0.3% of students categorized as high credit risk [6]. Strayer’s financially sound student base should help deflect the impacts of the credit problems riddling the economy.
The company also maintains a favorable days sales outstanding measure of only 12 days [8]. This comes from of their core policies of demanding tuition payments up front. The company has also instituted a 5% tuition hike starting at the beginning of this year.
The Results:
On a year over year basis the company has grown in double digit rates on key financial measures.
Who is running Strayer’s Ship?
Robert Silberman, is the current steward of Strayer and has guided the company through successful organic growth. He received the CEO of the year award in 2007 from Morningstar for focusing on long term academic quality over short term financial gains [7]. In his letter to shareholders in the company’s 2007 annual report he calls immediate attention to the VP of campus expansion, Kristen Jones, for her success in helping the company through its expansion efforts. This is followed up by other “thank you” acknowledgements to the rest of his executive team. It is not often you see executive management receiving pats on the back in the opening pages of annual reports. This highlights Mr.Silberman’s focus on team recognition and demonstrates his confidence in them. It does well for morale, and more often than not, translates down the ranks.
What is Strayer Worth?
Honing down a valuation for the company’s operations was relatively easy compared to other companies due to its consistent performance. My best/worst case valuation range came in at $105/share to $155/share.
Both scenarios assumed the company would be in operation for 10 years and beyond, generating positive free cash flow in each year of operation. Estimates for the cost of doing business (COGS, SGA, Capital Expenditures) were pinned based on the company’s past 5 years of operations. The difference between the best and worst case valuation was with estimated revenue growth rates. For the best case scenario, Strayer would grow revenues at 22% for each of the next 5 years, and tail off to 8%. The worst case scenario was estimated at 17% growth for the next 5, and tail off to 5% thereafter. These assumptions don’t veer very far from the company’s past performance.
The company’s shares are currently running at $213/share with a P/E ratio of 45, and running at an extremely rich valuation. The company does have a major risk in that 25% of its revenues comes from employer sponsored tuition. With the economy sliding, companies may be cutting back on employee education. Strayer may be able to counteract with an increase in student enrollments from layed-off workers looking to retool their skill sets. Interesting scenario isn’t it? There is a better entry point to take up ownership in this finely run company.
References:
1.
2007 Strayer Annual Report., Page 9, 11.
2.
2007 Strayer Annual Report., Page 47.
3.
2007 Strayer Annual Report ., Page 18.
4.
2008 Q1 earnings call transcript, SeekingAlpha.com
5.Tomsho, Robert.,
Tough Assignment: Find College Loans, June.1.2007, WSJ.com,
6.
2007 Strayer Annual Report ., Page.27
7.
Chief Executive at Strayer Inc. Is Named CEO of the Year, Chronicle., Jan.4.2008
8.
2007 Strayer Annual Report ., Page.48
9.De Los Reyes, Michael.,
DeVry sells Houston Campus, Daily Herald., March.8.2008
