Strategic Education: A Beaten-Up Stock With Lots Of Room To Grow (NASDAQ:STRA)

Strategic Education (STRA) is the owner of several different education businesses, including two online universities (Capella and Strayer) and numerous coding schools. The company also runs the online MBA Jack Welch Management Institute program. The stock is down 31.31% from a year ago, and we believe there is significant upside.

(Strategic Education Market Chart – Seeking Alpha, 2020)

Strategic Education performed well in Q2 2020 despite the pandemic

(Strategic Education Q2 Investor Presentation, 2020)

Strategic Education reports its earnings under 2 major pillars, as reported revenue for Strayer University also includes the online MBA program and the coding schools.

(Strategic Education Q2 Investor Presentation, 2020)

Although new enrollment was down slightly overall at 2%, it is fantastic to see that continuing student enrollment increased a substantial 5%, suggesting that students part of Strategic Education’s offerings have stuck with the online school model. We believe that in the coming quarters, there will be quite a bit of enrollment volatility, but many students who would otherwise attend traditional on-campus universities are looking for alternative education opportunities, and room for positive growth is viable.

We believe Strategic Education’s online school offerings are well-diversified and quite unique. The Jack Welch Management Institute is an online MBA program and ranked within the top 25 online MBA programs by Princeton Review (Source: Strategic Education Q2 Investor Presentation, 2020). Strategic Education recruits heavily for this program on LinkedIn through direct messaging and advertisements, which is a fantastic target customer segment given that many of those on the professional networking site are looking to either find a job or expand their skills through school. Moreover, online software development/engineering schools, in general, are growing substantially and gaining market share as more students look for alternatives to expensive 4-year undergrad programs. Therefore, although there are many competitors in this space, Strategic Education is bound to see an increase in enrollment as a result of the current macroeconomic situation. DevMountain provides an affordable and high-quality coding education, and HackBright is an engineering school dedicated to women. HackBright is a special program to pay attention to, since there has always been a stigma around the gender gap in the engineering field. HackBright is focused on curating a positive experience for women by providing them with an education in a more comfortable and familiar setting, which could actually pose a competitive advantage in comparison to traditional coding schools.

Strategic Education has maintained a healthy balance sheet while pursuing new opportunities

Before the acquisition of a portion of Laureate Education, which will be talked about in the next paragraph, Strategic Education had a current ratio of 3.7x and had nearly half a billion dollars in cash and equivalents. We believe that this excellent financial management shows that the company wouldn’t engage in an acquisition unless it saw tremendous opportunity.

(STRA Koyfin Financial Analysis, 2020)

On the asset side, it is pleasing to see that as of June 30, 2020, most current assets were cash and equivalents. Many education companies have notable receivables accounts with high figures, whereas for Strategic Education, approximately only 10% of current assets are related to receivables. Therefore, it is important to note that any potential write-downs of the receivables account given the macroeconomic environment will produce a nominal effect on the company’s balance sheet.

(STRA Koyfin Financial Analysis, 2020)

On the liability side, the company has no short or long-term debt, which is a sign of fantastic financial health. In fact, on June 30, 2020, Strategic Education had more cash and equivalents than the entire total liabilities figure.

(STRA Koyfin Financial Analysis, 2020)

Despite the coronavirus, Strategic Education has proven to be a profitable business and has kept the cost of revenues identical to pre-COVID-19 levels, as well as SG&A costs. Operating income has seen an impressive jump since 3Q 2019 and points to the fact that the company hasn’t really been disturbed by COVID-19.

We believe that since overall costs have been kept the same throughout the coronavirus, this indicates that nothing major has fundamentally changed about the business model and going forward, and the company will benefit as it can focus efforts on its new acquisitions and revenue streams. We do acknowledge that some on-campus activities within Strategic Education’s businesses have shifted online for the time being, but we believe it barely affects the big picture given that like other traditional universities, the same tuition rates can be charged. Strategic Education has proven that it is able to produce positive net income figures despite any challenges, therefore we believe the company continues to pay its quarterly dividend of $0.60. The current yield of 2.63% isn’t glorious, but it is a tremendous complement to a company that has lots of room for growth.

Strategic Education’s deal with Laureate provides more opportunity for growth

The company has already shown a history of effective M&A transactions, and at the end of July 2020, Strategic Education completed a deal to acquire the Australian and New Zealand operations of Laureate Education. The deal comprises of three different schools: Torrens University, Think Education and Media Design School. Media Design School is the “no.1 digital design school in the Asia Pacific” and offers subjects such as 3D animation and graphic design.

(Media Design School website)

Strategic CEO Karl McDonell stated that, “we have been impressed by the growth and impact of the three Laureate institutions have made (Laureate, 2020).” This deal further diversifies Strategic Education’s business into new subject offerings such as media and design in two new countries. The company may also see impressive growth within these three new schools given that Australia and New Zealand have done very well with COVID-19, and more students may be more comfortable in spending money on learning experiences.

Growing competition and unannounced Laureate deal information causes uncertainty

As mentioned before, the growing demand for alternative schooling options is met by the supply of new, innovative schooling services. Strategic Education is surely one of those companies offering alternative schooling paths, but it competes in an extremely competitive space.

Moreover, the deal with Laureate causes lots of uncertainty, especially in terms of how the company might use net income and cash flow moving forward. Since the purchase price of the Laureate deal is approximately $642.7 million, Strategic Education will definitely secure some cash from lenders to fund the deal, and the company recently expanded its credit facility from $250 million to $350 million (Source: Strategic Education Q2 Investor Presentation, 2020). This suggests that a large sum of money may need to be borrowed. Strategic Education may also need to acquire a portion of Laureate’s debt, and that sum is unknown at the current moment, and any notable figure could affect Strategic Education’s to pay off its eventual credit facility figure in a timely manner.

In summation, Strategic Education continues to expand its business through its existing offering and the acquisition of three new schools. The company has done a tremendous job in the past few quarters in managing and maintaining overall costs, and is quite undervalued given its share price tumble since June 2020 and its forward P/E ratio of 13.50.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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