Studying Strayer (STRA)
November 29, 2009
[AF addendum: Strayer Education , discussed below, is also the subject of a short article by Cy Lynch, BI’s growth stock guru, and his completed SSG both appear in the January 2010 on-line issue of Better Investing Magazine.]
– One purpose of this post is to demonstrate the powerful effect of projecting future growth from the last quarter of reported data vs. the last fiscal year.
** With that single change, my Forecast High EPS was some 16% greater than the Ken Kavula/Consensus SSG Forecast High EPS for Strayer Education (STRA). Strayer was the Online Stock Study for October, we both used the same EPS estimate, and the only difference was that I projected growth from the end of the last Q while Ken & the Consensus projected from the end of the last FY.
– Another purpose is to evaluate the different judgments that led Ken & the Consensus to decide that STRA was a SSG Buy while I concluded that it was a SSG Don’t Buy.
Online Stock Study:
– Strayer Education (STRA) was the Online Stock Study for October 2009 at the Better Investing website and was led by Ken Kavula, chairman of the BI Advisory Board and a small company guru.
– BI members can download the Audio Presentation (54 mins), Presentation Slides, Value Line Reports, and the Completed SSG.
Company Background:
– Strayer Education (STRA) and its subsidiary, Strayer University, are for-profit companies. At the end of 2008, SU had some 46,000 students at 71 campuses in 15 states (mostly on the SE coast) and a large online student body.
– SU offered the following degrees: Bachelor’s (54%), Master’s (27%) and Associates (11%) and its students were majoring in Business/Economics (61%), Information Systems (16%), and Accounting (12%).
– Morningstar reported that enrollment growth has averaged 18% per year for the last 5 years due to additional online students and new campuses. Strayer currently seeks to add about 6-11 campuses annually.
– Morningstar also reported that Strayer has a lower cost structure than traditional schools, but offers its courses at similar prices. And, according to Reuters, online courses are priced the same as on-campus offerings with over 32,000 students participating in SU’s online programs.
– Strayer’s revenue comes from three sources according to Wikinvest: about half is paid via federally insured loans, about 20% is paid by companies whose employees attend SU, and the rest is paid directly by students.
– Graduate level tuition at SU costs $2050 per course and undergraduate tuition costs $1515 per course for full-time students and $1590 for part-timers. A BBA degree requires 180 credit hours and costs (at 3 credits per course) some $95,000.
– In Q 3, which ended 9/30/09, revenues increased 31% due to increased enrollment and a 5% tuition increase that was effective January 1st. Enrollment increased 22% to 54,317 students with 39,129 taking at least one online class.
Company Financials:
– Value Line gave Strayer an “A” for Financial Strength, reported no debt and $38.6 M in cash as of 6/30/09.
– Morningstar says that Strayer is in “excellent” financial health with no debt and has the highest score for financial responsibility from the US Dept of Education.
Discussion:
– The following table compares the Consensus & Ken Kavula SSG with two of mine and with Take Stock. The only difference between my two SSGs is that Armin-1 uses S&P data while Armin-2 uses Hemscott-Morningstar data. After the table, I discuss issues identified by the comparison.
Strayer Education (STRA) | Consensus & KenK’s SSG | Armin’s SSG-1 | Armin’s SSG-2 | Take Stock |
Date | 10/6/2009 | Same | Same | 10/3/09 |
Data | S&P | S&P | Hemscott-Morningstar | Hemscott-Morningstar |
Price | $221.10 | Same | Same | $211.83 |
52 week High & Low Price | $239.99 & $143.53 | Same | Same | Not Included |
Last Q of Reported Data | Q2 ending 06/30/09 | Same | Same | Q2 ending 06/30/09 |
Software Used | Online SSG | TK 5 | Same | TS Online |
Project Growth From End of | Last FY | Last Q | Last Q | Last FY |
Sales Growth | 19.00% (Consen.) 18.00% (Ken) | Same | Same | 20.00% |
EPS Growth | 19.00% | Same | Same | 18.50% |
High PE | 35.0 (Ken) | 30.0 | Same | 30.0 |
High EPS | $13.53 | $15.77 | $15.74 | $13.24 |
High Price | $473.55 (4.0% > VL) | $473.10 ($4.0% > VL) | $499.80 (9.8% > VL) | $397.20 |
Value Line Estimated High Price = $335-455 as of 7/31/09 | ||||
Low PE | 25.0 (Ken) | 18.7 | Same | 16.5 |
Low EPS | $6.61 | Same | $6.60 | $6.28 |
Low Price | $165.77 | $123.60 | $123.40 | $156.60 (yield supported low) |
Upside/Down | 4.52 | 2.60 | 2.90 | 3.36 (imputed) |
Total Return | 17.91% | 17.00% | 18.8% | 15.10% |
SSG Buy Under | Not Included | $210.98 | $217.50 | $213.97 |
RV/PRV (no outliers) | Not Included | 101.5/85.4 | 95.2/89.5 | Not Included |
RV/PRV (2004 out) | Not Included | 106.4/89.5 (2004 out) | 101.0/89.6 (2004 out) | Not Included |
Quality | Ken = Pass | S&P = A | None | TS = 10 (highest) |
PTPM – 5 yr ave | 33.94% Trend N/A | 33.9% Trend Down | Same Same | 33.90% Trend N/A |
ROE – 5 yr ave End Equity | 33.47% Trend N/A | 33.5% Trend Up | Same Same | Not Included |
ROE – 5 yr ave Start Equity | N/A | 36.7% Trend Up | 49.1 Trend Down | 47.1% Trend N/A |
Debt to Equity – 5 yr ave | -0- Trend Even | Same | Same Same | Not Included |
(1) CONSENSUS & KEN’S SSG:
Future Sales Growth:
– Ken gave the group 5 choices to estimate STRA’s future Sales growth: 22.00%, its ten year historical growth; 21.00%, its five year historical growth; 22.80%, Value Line’s estimate [??]; 19.00%, Morningstar’s estimate; and Other.
** Value Line makes no long-term Sales estimate and Ken did not explain how he determined that 22.80% was VL’s estimate.
– The Consensus (49%) agreed on 19.00%, Morningstar’s estimate, but Ken decided that 18.00% was better even though it was not offered as a choice.
– Ken has a strange understanding of consensus decision-making!!
Future EPS Growth:
– Ken used the NAIC/BI Preferred Procedure as one estimate of future EPS growth and relied essentially on the software default values: Sales = 18.0%; Pre-Tax Profit Margin = 34.0% (the only change from the 33.9% default); Taxes = 38.5%; and Shares Outstanding = 14.0 M. His PP result was 19.0% EPS.
** One participant asked why he didn’t use VL’s higher estimate of 14.5 M shares outstanding in the next 3-5 years and Ken said he thought VL’s report on Strayer was too aggressive.
– Ken gave the group 5 choices to estimate future EPS growth: 20.00%, the S&P estimate; 18.60%, STRA’s 10 year historical growth; 24.60%, VL’s estimate; 19.00%, Ken’s PP; and Other.
– The Consensus (47%) agreed on 19.00%, Ken’s PP, and not surprisingly Ken did not disagree this time.
Forecast High PE:
– Ken offered 5 choices: 40.4, the 5 year average High PE; 38.2, the 10 year average; 42.6, the 2 year average; 42.3, the most recent year High PE; and Other.
– Before the vote, Ken said he personally would only use the “Other” choice, but gave no further guidance. It’s no surprise that the Consensus (76%) chose “Other” and Ken then chose 35.0, but gave no reason.
Forecast Low PE:
– Ken gave participants 5 choices: 25.3, the 5 year average Low PE; 21.1, the 10 year average; 24.2, the 2 year average; 25.1, the most recent year Low PE.
– The Consensus (39%) chose 21.1, the 10 year average, but Ken again disregarded the Consensus and selected 25.0, and again gave no reason.
Final Results:
– Neither the Forecast High nor Low Prices involve judgment with the Onlune SSG:
** The Forecast High Price is simply the product of the Forecast High PE (30.0) multiplied by the Forecast High EPS ($13.53) which totaled $473.10, some 4.00% greater than the high end of VL’s $335-455 High Price estimate. I guess this VL estimate was not too aggressive for Ken.
** The Online SSG offers no options to decide the Forecast Low Price, unlike our SSG software, and relies soley on the Low PE x Low EPS which totaled $165.77.
(2) Armin’s SSG:
Projecting Growth From:
– SSG software lets us choose from three options to project future growth (Last FY, Last Q, the historical trend line) and I chose the Last Q in order to demonstrate the powerful effect of this decision.
– Ken chose to use the Online SSG which offers no options and always projects growth from the Last FY.
Future EPS Growth:
– I deliberately used 19.00% EPS growth, just as Ken did, and got a High EPS of $15.77 compared to his $13.53, a difference of 16.6% with S&P or with Hemscott-Morningstar data which, to me, is no small potatoes.
** The difference would have been 23.3% if I had projected from STRA’s Q3 which ended on 9/30/09, but was reported after the Online Stock Study, and Ken & the Consensus continued to use the Online SSG and project growth from the last FY.
– The seven different analysts I always check for every SSG were estimating long-term EPS at 21.06% with Value Line high at 25.00% and FactSet via Morningstar.com low at 19.50%. S&P and FactSet CallStreet via CNNMoney.com were both 20.00%, Zacks.com was 20.44%, Reuters was 21.24%, and Reuters Thomson via Yahoo Finance was 21.25%.
– The six analysts at FactSet Call Street via CNN Money.com ranged from a low of 14.00% to a high of 23.0%. The six analysts at Reuters.com ranged from a low of 18.00% to a high of 24.40%.
– Any EPS estimate lower than 14.00% is way too low for me while higher than 24.40 or 25.00% seems way too high. These low and high estimates are how I determine what’s reasonable and what’s not; see: Determining What’s Reasonable and What’s Not: An Update
– For how I estimate EPS for all my SSGs, see: Estimating EPS
Forecast High PE:
– I used 30.0 compared to Ken’s 35.0 which I thought was too high. Toolkit’s Alt-M command usually is the most conservative option. It eliminates the 5 highest High PEs in the last 10 years, averages the rest, and shows 31.9 with S&P data (31.5 with Hemscott data). The Online SSG that Ken used does not include the Alt-M command.
Forecast Low PE:
– The major difference between Ken’s SSG and mine is our Forecast Low PEs. Ken used 25.0 while I used 18.7. This explains why I got a SSG Don’t Buy while Ken got a SSG Buy.
(3) Pretax Profit Margin (PTPM) and Return on Equity (ROE):
– Ken missed or ignored the 5 year downtrend in PTPM (Presentation Slide 26) which typically signals a red-flag warning sign of potential trouble.
– STRA’s PTPM us better than its Industry Average (33.9% vs 14.4%), but the company’s ROE is worse than its Industry Average (33.5% vs 39.9%).
– Ken compared STRA to three peers: Apollo Group (APOL), ITT Educational (ESI) and DeVry (DV). He found that STRA was better than the three peers in terms of PTPM, but worse than 2 of the three in terms of ROE.
– Armin
Armin,
I’ve read others’ comments about where to start the future growth rate projection on the SSG, but never really paid attention to it until I started reading your blog. I now realize it can make quite a difference and have changed my ways. Thanks.
Eric
Hi Eric:
Thanks for your comment. That’s a major reason why I dislike BI’s Online SSG because it only projects future growth from the last FY. The same is true for Take Stock Online, only that is a deliberate design to be conservative whereas with the Online SSG I think it’s primarily inadvertence.
Other problems with the Online SSG: only one method to determine the Low Price (Low PE x Low EPS); no trend lines for PTPM & ROE; no RV & PRV.
I’ve been sick with the flu and it’s hard to write or even answer my mail. I’m getting better, but I was knocked-out last week.
Armin