On Nov 14, Zacks Investment Research upgraded Strayer Education, Inc. (STRA) to a Zacks Rank #1 (Strong Buy). Most of the estimates have been moving upward since the education company reported better-than-expected third quarter 2014 results and provided an optimistic outlook for fiscal 2015 on Oct 30. Strayer Education’s share price has increased about 6% since the company released its third quarter 2014 results.
Why the Upgrade?
This education company reported third-quarter 2014 adjusted earnings of 37 cents per share, which increased 23% year over year and surpassed the Zacks Consensus Estimate of 18 cents by 105.6%.
The upside reflects increase in new student enrollment, lower-than-expected decline in revenue per student, and a decline in total cost and expenses.
Though total revenue of $100.8 million declined year over year, it beat the Zacks Consensus Estimate of $99 million by 1.98% possibly due to a lower-than-expected enrollment decline.
Revenue per student decreased 2.8% during the quarter, better than a 4.7% decline in the previous quarter. The rate of decline moderated as a result of higher student retention and lower drop out rates.
Strayer’s total enrollments have been declining due to continued unemployment, an overall economic downturn and a subsequent decline in student demand. However, the company has been taking several initiatives to drive new enrollments. This includes a 20% cut in tuition rates of undergraduate students for the winter term of 2014. The company also introduced the Graduation Fund in mid-2013, which offers one free course for every three programs completed successfully. These initiatives have resulted in improved starts for the last few quarters. During the third quarter of 2014, new enrollments rose 5%, higher than a 2% increase in the prior quarter.
Operating margin rose 310 basis points to 9.1% due to cost saving measures. Bad debt expense as a percentage of revenues was 3.6% in the third quarter, lower than 4.5% in the year-ago quarter but higher than 3.2% in the prior quarter.
On the back of higher student retention and lower drop out rate, Strayer Education now expects revenue per student to decline less than 4% compared to the prior expected range of 4% to 5% decline in 2014.
Meanwhile, the company expects total enrollment to turn positive in the first or second quarter of 2015, thanks to recent new enrollment trends. In fact, revenues are expected to turn positive about two quarters later. Revenues for full year 2015 are expected to be flat to down 2%, better than the prior expectation of a low-single digit decline. Operating expenses are expected to be flat to down 2%.
Other Stocks to Consider
Other stocks in the education industry worth considering include GP Strategies Corp. (GPX), Grand Canyon Education, Inc. (LOPE) and Capella Education Co. (CPLA). All the three education companies sport a Zacks Rank #1 (Strong Buy).
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