2023-08-23 10:20:58 ET
Summary
- Strategic Education's growth was stalled by a disruption as a result of COVID-19, leading to a decline in enrollment in its US universities.
- Its Australia/NZ business is also facing volatile enrollments due to delays in visa processing, leading to decline in international students.
- It reported strong enrollment growth recently, and we anticipate possible stabilization in Australia/ NZ enrollments as visa processing gets faster.
- We believe the stock is already priced for recovery at 25x forward P/E. Initiate at Neutral.
Investment Thesis
Strategic Education (STRA) had a strong track record of growth historically while COVID-19 led to a significant disruption leading to closure of its classes and enrollments falling by over a fourth. Despite the reopening last year, it has not been able to drive its enrollment growth faster in the US while Australia/ New Zealand's enrollments were marred by delays in visa processing. It has reported strong quarterly results in Q2 with consecutive quarters of growth in enrollment and recovery at Strayer seems underway. However, we believe at 25x Forward P/E, a significant premium to its peers, most of the recovery is already baked into the stock. We initiate at Neutral as there is limited upside at current levels.
Background
Strategic Education is a provider of post-secondary education and related training through its accredited universities in the US (Strayer University and Capella University) and Australia/New Zealand (Torrens University). It also offers on-demand skills development courses including web and mobile application development. It boasts student strength of ~78k in the US along with additional ~20k students in Australia/New Zealand across different degree and related programs. In addition, it partners with several employers offering their employees access to relevant training and certifications through its education technology services offering.
Strong Earnings Momentum
STRA reported strong Q2 results with revenues growing 5% YoY driven by strength in its US Higher education segment partially offset by weakness in Australia/New Zealand segment. The growth was primarily driven by continued and strong recovery in Strayer and Capella which has shown strong growth in enrollments, up 4.7% for Q2 vs 2.3% in Q1. Enrollment has shown positive recovery from the COVID-19 downturn post its low of 75,000 students in Q3 2022, however, it still remains significantly below pre-covid levels.
Enrollment Recovery in US Higher Education Segment
The Australia/New Zealand market continues to remain challenging as a result of declines in international students due to delays in visa processing and its waiver of allowing international students to enroll courses from their home country, while domestic students continue to witness an uptick in enrollment.
In addition, education technology services continued to show resilient growth, up 22% YoY driven by continued employer-employee participation. Adjusted Operating margin declined 130 bps YoY as a result of sticky wage costs and investments within the US High education segment (which declined 290 bps), partially offset by improvement in Australia/New Zealand (which increased 360 bps YoY) as a result of pricing actions and improved course load. Adjusted EPS declined 3.5% YoY at $0.82 topping analyst expectations pegged at $0.69.
The balance sheet position remains strong with total liquidity of $316 mn including $215 mn of cash and cash equivalents and $101 mn of undrawn RCF facility. It has debt outstanding of just $101 mn yielding a net cash position.
It raised its guidance for the full year revenue growth to be above mid-single digit (vs mid-single digit earlier) while highlighting the operating expense growth to be 2-3% during H2 as a result of higher investments made during H1. While we believe the revenue guidance is reasonable given the strong momentum, we believe given the sticky inflation and wage pressures, the guidance for opex growth seems to be more difficult to achieve.
Valuation
STRA had a significant impact on its operations as a result of COVID-19 disruptions as a result of the shutdown of campuses while professors and students moved online. Its campuses reopened at the start of 2022 and enrollment continues to remain soft in the US, but has shown some positive recovery in the past 2 quarters and appears promising. It has declining Revenue and EBITDA growth over the past years compared to its peers as a result of the disruption, which is understandable, however, forward estimates also lag peers.
In terms of profitability, STRA fits in the bottom quartile compared to its peers with lower EBITDA and Net income margins. Even comparing the pre-covid levels for STRA, the company still fits within bottom to mid-bottom quartile in most of the parameters.
STRA trades at 24.9x Forward P/E and 10.4x EV/Forward EBITDA, at a significant premium compared to its peers despite lagging growth and profitability. We believe the optimism of outsized earnings growth as a result of improvement in enrollment within the US Higher education segment as well as stabilization in its Australia/New Zealand is already priced into the stock. We initiate at Neutral as a result of limited margin of safety at current levels.
Risks to Rating
Risks to our rating include:
1) Any impact on enrollment trends as a result of the significantly uncertain macro environment within the US;
2) Continued disruption in visa processing by the Australian government will have an impact in its Australia/NZ business as domestic student enrollment growth may not be able to stem the decline in international student enrollments;
3) Increase in student loan defaults as a result of the end of the student loan forgiveness program launched during COVID could hamper STRA's access to federal funding which could further have an impact on enrollments.
Conclusion
STRA has fallen over 20% since its highs in April this year while it has recovered some losses in the past month. We believe the recovery in Strayer is a positive sign for the company with further room to grow vs Pre-COVID levels. However, despite the fall, STRA trades at 25x Forward P/E at a significant premium to its peers and we believe the optimism on the Strayer recovery and stability is already baked into the price. We initiate at Neutral.
For further details see:
Strategic Education: Good Company At An Unattractive Valuation