2023-11-24 23:58:06 ET
Summary
- Strategic Education Inc. has surpassed market expectations and witnessed a stock uptick following solid quarterly performance.
- The surge in employer-affiliated enrollments and an uptick in tuition per student have contributed to the company's positive trajectory.
- Strategic Education's ambitious focus on automation and AI investments signals an exciting path forward, despite risks related to market dynamics and regulatory shifts.
Strategic Education Inc. ( STRA )'s recent quarterly performance has sparked optimism among investors. The company surpassed market expectations, witnessing a stock uptick following solid Q3 2023 results . In my earlier assessment, I maintained a 'hold' stance, cautious due to flattening growth despite recovery signals in the education market . However, recent developments paint a promising picture. Notably, the surge in employer-affiliated enrolments has been a pivotal catalyst, propelling revenue growth. Alongside this, a noteworthy uptick in tuition per student has contributed to the company's positive trajectory. While acknowledging risks related to market dynamics and regulatory shifts, Strategic Education's ambitious five-year plan , focusing on automation and AI investments, signals an exciting path forward. This, coupled with a robust performance in key segments, compels me to upgrade my stance to a bullish outlook for long-term investors.
Company updates
Following up on my prior analysis of Strategic Education, the company continues to make strides, showcasing a robust 7.7% year-over-year surge in enrolments, reaching an impressive 100,827 students. This growth story unfolds through three key revenue-generating segments: US Higher Education, Education Technology Services, and the Australia/New Zealand segment. In the recent quarter, Strategic Education displayed promising revenue growth spanning all three segments, largely fuelled by a surge in US Higher Education enrolments, particularly driven by employer-affiliated enrolments. This strategic move has played a pivotal role in bolstering revenue streams for the company.
Considering the company's growth trajectory, the 7.7% surge in student enrolments underscores its knack for attracting and retaining students—an essential driver for sustained revenue expansion. Moreover, its diverse revenue streams serve as a protective shield; if one segment falters, others can compensate, fortifying income stability. The deliberate emphasis on forging employer partnerships, notably fuelling enrolment growth in the US Higher Education segment, has yielded impressive results, potentially elevating future revenue prospects. While FY2023 guidance indicates single-digit growth compared to FY2022, the spotlight is on the company's ambitious five-year growth model. By allocating $4-5 million annually for the next three years towards automation and AI, it aims to harvest $30-$40 million in run-rate productivity savings, setting the stage for enhanced efficiencies and prolonged growth.
Financial updates
Strategic Education reported impressive financial growth in its recent Q3 2023, with a notable 8.7% YoY increase, reaching a total revenue of $285.9 million. Impressively, its net income more than doubled to $18.5 million, signalling enhanced margins. Additionally, their adjusted EBITDA reached $49.5 million, marking a robust 56.8% increase from the prior-year quarter.
Despite a decline in cash from operations year-over-year to $87.2 million from $124.7 million and a decrease in levered free cash flow to TTM $68.8 million, indicating a cash burn, Strategic Education maintains a shareholder-focused approach. The company has declared a $0.60 per share dividend, offering a forward yield of 2.83%, payable on December 4 for shareholders with an ex-dividend date on November 24. While mindful of the cash burn, it's notable that the company has sustained positive cash flow. However, ongoing attention to the company's ability to consistently generate adequate cash from operations remains crucial.
Examining the company's balance sheet reveals a current cash and cash equivalents position of $167.7 million, showing a decrease from the $213.7 million reported at the end of 2022. Noteworthy is their proactive debt reduction strategy, having successfully trimmed $40 million from their revolver, leaving a remaining debt of $61 million. Throughout the initial three quarters of 2023, capital expenditure amounted to $27.3 million, with a projected year-end target of around $40 million. This directed emphasis on capital expenditure could signify additional strategic investments geared towards fostering the company's growth trajectory.
Valuation
When evaluating Strategic Education against industry peers like 2U ( TWOU ), Adtalem Global Education ( ATGE ), and Grand Canyon Education ( LOPE ), it stands out as one of the rare education stocks offering a dividend. However, caution is warranted due to its relatively high forward price-to-earnings ratio of 34.86 compared to peers, indicating a potential overvaluation. Despite this concern, the company's outlined five-year growth target signalling improved top and bottom-line results fosters optimism for increased upside potential. This strategic roadmap towards growth instills confidence in the company's future trajectory, balancing the caution prompted by its current valuation.
Risks
Investors eyeing Strategic Education should carefully assess several risks associated with the company. Market volatility and potential economic downturns pose significant threats to student enrolments, potentially impacting revenue streams. Regulatory shifts, especially concerning foreign student policies in Australia, could disrupt operations and affect international student numbers. Intense competition within the education sector remains a constant challenge, potentially hindering the company's ability to attract and retain students amidst a crowded market.
Final thoughts
Strategic Education Inc.'s recent performance signals a compelling growth trajectory. Witnessing a notable surge in enrolments and a strategic focus on employer partnerships driving revenue growth, the company demonstrates resilience in a competitive education market. Despite concerns over its valuation metrics, particularly a higher forward price-to-earnings ratio compared to peers, the company's outlined five-year growth target, driven by investments into automation and AI, underscores its potential. Therefore, I upgraded my rating to a bullish stance.
For further details see:
Strategic Education: Leveraging Employer Affiliated Enrollments And Investing In Automation For Growth