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Here's Why You Should Buy Strategic Education (STRA) Now

Zacks Equity Research

Strategic Education, Inc. or SEI STRA has been gaining investor confidence buoyed by solid contribution from Strayer and Capella Universities. Year to date, the stock has rallied 48.6% compared with the industry’s 28.4% rise. Also, the company has outperformed the S&P 500’s 14.3% rise in the said period. The price performance is backed by SEI’s impressive earnings surprise history. Notably, the company surpassed earnings estimates in four of the five trailing quarters.

Recently, SEI reported better-than-expected first-quarter 2019 results. The positive performance was mainly backed by strong top-line numbers across its segments, given higher enrollment and lower operating expenses. The company’s adjusted earnings (on a pro-forma basis) increased 29.1% from the year-ago quarter. Total revenues also jumped 7.9% from the prior-year level.

Earnings estimates for 2019 and 2020 have been upwardly revised over the past few weeks, suggesting that sentiments on SEI are moving in the right direction. Notably, earnings estimates for 2019 and 2020 have increased 7.1% and 5.6%, respectively, over the past 30 days.

Let’s delve deeper into the factors that bode well for this Zacks Rank #1 (Strong Buy) company. You can see the complete list of today’s Zacks #1 Rank stocks here.

What’s Working in Favor of the Stock?

Strong Enrollment: Both Strayer and Capella Universities have been exhibiting stellar enrollment results. In first-quarter 2019, Strayer and Capella Universities’ new student enrollment increased 13% and 15%, and total enrollment grew 11.5% and 3.5%, respectively. Notably, Strayer University's new student enrollment growth represented the 10th consecutive quarter of new student growth.

At Capella, FlexPath has been performing significantly well, and now constitutes 30% of Capella's Bachelor and Master's degree enrollment. New FlexPath enrollments grew 52% and total FlexPath enrollments increased 43% from the prior-year quarter. FlexPath enrollments now represent one-third of all non-doctoral students at Capella.

Effective Cost-Control Measures & Solid Growth Prospects: The company has been registering higher operating margins, given ongoing focus on various productivity initiatives. For instance, the Strayer segment’s adjusted operating margin increased 390 basis points (bps) during the first quarter. Capella’s adjusted operating margin expanded 330 bps in the quarter.

Overall, SEI’s adjusted operating margin expanded 430 bps year over year in the first quarter. Of the total operating margin expansion, 300 bps was resulted from merger synergies and 120 bps from improved productivity in the business. This improvement is helping the company to boost profitability.

Higher revenues and lower operating expenses continue to drive growth. SEI has solid growth prospects, as is evident from the Zacks Consensus Estimate for 2019 earnings of $6.47 per share, which indicates 36.2% year-over-year improvement on 55.7% revenue growth. Moreover, its earnings are expected to increase 15.8% on 7.6% top-line growth in 2020.

Overall, it constitutes a great pick in terms of growth investment, supported by a Growth Score of A.

Affordable & Flexible Programs: Many students are unable to complete their graduation programs due to high fees or related costs. In light of this, Strayer University is reducing the cost of its programs so as to increase their affordability. In this regard, Capella University’s FlexPath direct assessment model helps students via providing lower tuition costs, reduced time to complete a program and increased flexibility.

SEI initiated the deployment of more aggressive technology innovations including artificial intelligence and automation, which will enable to reduce operating costs and thus improve its ability to support lower tuition expenses.

Other Stocks to Consider

Other top-ranked stocks in the Zacks Schools industry include Bright Horizons Family Solutions Inc. BFAM, Grand Canyon Education, Inc. LOPE and K12 Inc. LRN, each carrying a Zacks Rank #2 (Buy).

Bright Horizons’ earnings per share are expected to increase 12.8% this year.

Grand Canyon has a three-five year expected EPS growth rate of 16%.

K12’s 2019 earnings per share are likely to grow 23.5%.

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