Why Is Strategic Education (STRA) Down 23% Since Last Earnings Report?
It has been about a month since the last earnings report for Strategic Education (STRA). Shares have lost about 23% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Strategic Education due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Strategic Education Q2 Earnings Beat Estimates
Strategic Education, Inc. or SEI reported stellar results for second-quarter 2020, wherein the company’s earnings and revenues not only topped analysts’ expectations but also grew from the year-ago level. The uptick was mainly backed by strong top-line numbers, and margins in Strayer and Capella universities.
It reported adjusted earnings of $2.06 per share, which surpassed the Zacks Consensus Estimate of $1.66 by 24.1% and increased 29.6% from the year-ago quarter.
Total revenues of $255.8 million also surpassed the consensus estimate of $246 million by 4%. Notably, the reported figure also grew 4.4% from the prior-year level.
SEI currently operates in two reportable segments: Strayer (accounting for 54% of total second-quarter 2020 revenues) and Capella (46%).
Strayer University: Strayer University’s revenues grew 4.8% year over year to $138.1 million due to higher enrollment. Total enrollment also grew 6% from the year-ago level to 53,782 students. Enrollment of new students declined 4% but that of continuing students rose 8% from the year-ago quarter. The segment’s quarterly operating margin increased 740 basis points (bps) to 25.9%.
Capella University: The segment’s quarterly revenues came in at $117.8 million, reflecting 3.9% year-over-year growth backed by higher enrollment and revenue-per-student.
Total enrollment at the university grew 1% from the year-ago quarter to 39,341 students. New and continuing student enrollment both increased 1% year over year. The upside was mainly driven by improved performance of FlexPath, which comprises 37% of Capella University’s Bachelor’s and Master’s degrees total enrollment.
Its operating margin came in at 23.1% for the reported quarter, up 410 bps from the year-ago level.
Adjusted operating margin for the reported quarter was 24.6%, up 580 bps year over year. Adjusted EBITDA was $77.7 million for the reported period, up 28.9% year over year.
As of Jun 30, 2020, SEI had cash, cash equivalents, and marketable securities of $525.3 million compared with $491.2 million and $506.3 million on Dec 31, 2019 and Mar 31, 2020, respectively. Notably, the company had no debt. It had $250 million of undrawn credit as of Jun 30, 2020.
The company pointed out that COVID-led unemployment impacted demand in the back half of the second quarter, which in turn hurt overall enrollment results.
Although rising unemployment level has been adversely impacting both Strayer and Capella Universities, the impact is more on the former, as this university has more undergraduate student mix, including many first-time college students.
For its summer academic term, which represents Strayer’s third-quarter enrollment, the company expects new student enrollment to be down 27% from the prior year, while total enrollment is projected to be down between 0% and 1%.
Notably, Capella focuses more on graduate education and is less sensitive to the current economic downturn. Its overall demand environment has witnessed less impact than Strayer.
Based on the current enrollment trends and cost-management efforts, the company expects both revenues and adjusted operating income to remain flat year over year in the third quarter.
For 2020, it projects revenues to be flat to up 1%. Adjusted operating income and pre-tax income are expected to be up in low to mid-single digits from the prior year.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -9.49% due to these changes.
Currently, Strategic Education has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Strategic Education has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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