Studying Strayer (STRA)

[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 1^st. 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