Stayer Education - A Wax Ink Raw Value Report
How It Got Here
Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on February 17, 2009.
Strayer Education, Inc. (Nasdaq: STRA) is a for-profit post-secondary education services corporation whose mission is to make high quality, post-secondary education achievable and convenient for working adults in today’s economy.
Founded in 1892, Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration at 65 physical campuses in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, West Virginia, and Washington, D.C.
As of December 31, 2008, the university had more than 44,000 students enrolled in their programs. Strayer University is accredited by the Middle States Commission on Higher Education, one of the six regional collegiate accrediting agencies recognized by the U.S. Secretary of Education. As part of its program offering, the University also offers classes online via the Internet, providing its working adult students a flexible and convenient alternative.
Over the last several years, the company has experienced significant growth, primarily by expanding geographically by opening new campuses. Since the company's initial public offering in 1996, they have grown from eight campuses in one state and Washington, D.C., to 65 campuses in 14 states and Washington, D.C.
The company's stated mission is to serve working adults’ demand for post-secondary education. To achieve this objective the company has opened new campuses in promising areas in those states in which they currently operate physical campuses, as well as by expanding into contiguous states that exhibit strong demand for adult education in business and information technology programs.
The company has opened 51 of campuses since the beginning of 2001 and currently plans to open 11 new campuses in 2009, including five already opened.
Since receiving regulatory approval to offer our degree programs online in 1997, online programs have experienced rapid growth, with over 32,000 students enrolled in at least one class online during the 2008 fall term. To better serve students who do not reside or work near a physical campus location, the company plans to open a second Global Online Operations Center in 2009.
In May 2001, management hired a new senior management team, made significant investments in information technology infrastructure to support planned growth in its online programs, and began a long term program to open new campuses in areas where there is a strong demand for adult education. These efforts have allowed the company to grow revenues between 2000 and 2008 by 23% on a compound annual basis.
During the same period, diluted earnings per share grew at a compound annual rate of 19% including the impact of stock-based compensation which the company began recording in 2006.
The company charges tuition by the course. Each course is 4.5 credit hours. As of January 1, 2009, undergraduate full-time students are charged $1435.00 per course, undergraduate part-time students are charged $1510.00 per course, and students in graduate programs are charged at the rate of $1945.00 per course.
Accordingly, a full-time student seeking to obtain a bachelor’s degree in four years currently would pay approximately $14,000 per year in tuition.
Strayer University implemented a tuition price increase of approximately 5% per course effective January 1, 2009, which is reflected in the above tuition rates.
Under a variety of different programs, Strayer University offers scholarships and tuition discounts to active duty military students and in connection with various corporate and government sponsorship and tuition reimbursement arrangements.
Strayer University’s cohort (student loan) default rates on FFEL Program loans for the 2004, 2005, and 2006 federal fiscal years, the three most recent years for which this information is available, were 4.5%, 3.9%, and 3.8%, respectively, while the default rates for proprietary institutions nationally were 8.6%, 8.2%, and 9.7% in federal fiscal years 2004, 2005, and 2006, respectively.
The company leases all of their campus and administrative facilities except for five campus facilities which they own. Their campuses are located in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, West Virginia, and Washington, D.C., and their corporate headquarters is located in Virginia.
Leases generally range from five to ten years with one to two renewal options for extended terms. As of December 31, 2008, the company leased 67 campus and administrative facilities consisting of approximately 985,000 square feet. The facilities the company owns consist of approximately 110,000 square feet.
Management evaluates current utilization of facilities and projected enrollment growth to determine facility needs. The company anticipates that approximately an additional 200,000 square feet will be leased in 2009. The company also signed a lease for approximately 100,000 square feet in Herndon, Virginia for their corporate headquarters. Occupancy of the space is scheduled for 2010.
The company paid dividends during fiscal 2008 of $3.65 per share. But that dividend payout, included a one-time special dividend of $2.00 per share as declared by the Board of Directors on October 30, 2007, and paid on January 16, 2008.
According to the company's latest SEC Form DEF 14A filing of March 23, 2009, Fidelity Management and Research owns or controls 12.6% of the outstanding shares of company stock, Baron Capital Group owns or controls 9% of the outstanding shares of company stock, and the ever present Barclay's Global Investors owns or controls 5.4% of the outstanding shares of company stock.
Curiously, Chairman and CEO Rober Silberman owns only 2% of the outstanding share of company stock, but that 2% includes 183,680 restricted shares which were granted on February 10, 2009 and won't vest 100% until February 10, 2019. Mr. Silberman however does have the right to vote these shares that he does not yet own, as well as receive cash dividends on these shares that he does not yet own. He simply cannot sell them...because he doesn't yet own them?
Collectively, all of the Directors and Executive Officers of the company own outright, or have vesting interest in, 479,275 of the outstanding shares of company stock, or about 3.4% of the total shares outstanding.
The company does not offer any perquisites except for reimbursement of relocation expenses including tax gross-ups, when applicable. This perquisite is offered to any named executive officer hired from a different location to encourage prospective executives to relocate.
Annual Retainer. Each eligible director is paid an annual fee of $80,000 in quarterly installments. Of this amount, 50% (or $40,000) of the annual fee is paid in cash and 50% in shares of restricted stock. Instead of receiving a cash payment, directors may elect to have up to 100% of their annual retainer paid in restricted stock.
Restricted Stock. As part of the annual retainer, $40,000 — $80,000 of restricted stock is issued to directors on the date of the annual meeting. The stock vests over three years, with one-third of the stock vesting each year. In the event any eligible Director wishes to retire from the Board of Directors, or wishes to resign from the Board to serve in another capacity that might preclude further service on the Board of Directors, and holds shares of unvested restricted stock in the corporation, the Board of Directors may, in its discretion, waive the remaining vesting period(s) for all or any portion of such shares provided that the Director shall have served at least five years on the Board of Directors of the Corporation.
Fees and Reimbursements. Members of the Audit Committee receive an additional fee of $1,000 per meeting, generally $4,000 per year. In addition, directors are reimbursed for out-of-pocket expenses incurred in connection with their attendance at Board and Committee meetings.
The company had no transactions with related parties during the fiscal year ended December 31, 2008, and prohibits conflict of interest activities by any Director or Officer unless specifically approved in advance and in writing by the company's General Counsel, CEO, and the Audit Committee of the Board of Directors after full disclosure of all aspects of the activity. In addition, company policy dictates that any such activity will be publicly disclosed.
While there are other companies in the same Industry Sector, there are few that can compete directly with Strayer. Certainly Apollo Group, Inc. (Nasdaq: APOL), Capella Education Company, Inc. (Nasdaq: CPLA), and Corinthian Colleges, Inc. (Nasdaq: COCO), all offer similar degree programs, but we believe only Strayer has taken the time to understand that tuition and campus location are the keys to success in their industry. Accordinly, we anticipate that the company will continue to dominate its competition.
We are not about to pay $216.09 per share to own this stock, which was a recent closing price. The reason we are not is because it is on our watch list with a Reasonable Value Estimate of $146.74, a Buy Target of $73.37, a First Sell Target of $143.07, and a Close Target of $154.88.
Admittedly, we are impressed that the company has been able to execute a fairly aggressive growth strategy over the past several years while keeping itself debt free. Not only has the company been able to increase its 2008 earnings from 2007 levels by almost 20%, the company has also managed to increase its 2008 Free Cash Flow from 2007 levels by almost 70%, ending fiscal 2008 with Free Cash Flow of $5.89.
How is this possible? All of the company's campus facilities, with the exception of 5 such, are leased. In addition, the company is reimbursed by the lessor for improvements made to the leased facilities. These reimbursements were capitalized as leasehold improvements and a long-term liability established. The leasehold improvements and the long-term liability are amortized on a straight-line basis over the corresponding lease terms, which range from five to ten years.
The company then records rent expense on a straight-line basis over the initial term of a lease with the difference between the rent payment and the straight-line rent expense recorded as a long-term liability. The company also records the non-current portion of the gain related to the sale and lease back of a campus facility as a long-term liability.
We found one other noteworthy piece of information in the company's latest 10-K...restricted cash. Generally cash is restricted because a lender requires a company to withhold from general corporate purposes, a specific amount of cash. Often, before these restricted dollars can be spent, the company's lenders have to have full understanding as to why the funds are needed, and loan covenants must be modified.
In the case of Strayer, we found that the company does have $500,000 of restricted cash in an interest-bearing account, and that while not listed specifically as restricted cash, the amount is included as a long-term asset.
The reason for the restricted cash? The State of Pennsylvania requires the company to maintain a “minimum protective endowment” before it can operate in the state. We are not sure what actual purpose this "endowment" serves except to allow the company to do business in Pennsylvania.
Investment Opinion and Worksheet
As we have stated, we are impressed with many things about this company, and at least on paper, it all seems to make sense...the reason for the company's growth rate, the year over year increases in earnings and free cash flow, even the company's restricted cash. It all seems explicable.
But we keep thinking of Bernie Madoff and how his company kept improving year over year, until finally it became mathematically impossible that such improvements could occur. When that happened, lots of people lost lots of money.
Certainly we are not saying the same is true with Strayer Education. What we are saying is that the stock price has had a meteoric rise over the past 13 years, moving from $6.31 in June 1996, to a recent close of $216.09, and that in our opinion the stock is extremely overvalued, as noted by a recent trailing twelve month PE of 40.
We also note that Tangible Book Value at the end of fiscal 2008 was $12.40, about the same as it was at the end of fiscal 2007, which to us, when coupled with the recent PE of 40, and the company's cash on hand of $3.97 per share, increases investment risk.
Accordingly, because we believe there is increased investment risk, and because we further believe that such risk will increase going forward, we have lowered our Buy Target from $62 to $54, and currently have the stock rated as a Sell.
Strayer Education Worksheet 1208