Strayer provides postsecondary, career-oriented education.

Strayer

INVESTMENT HIGHLIGHTS

Well-managed for-profit education company, with a 121-year history, an established brand, and 46K students. It operates Strayer University, which has 100 campuses in two dozen U.S. states and is accredited by Middle States. Strayer focuses on education for working adults and benefits from employer partnerships with corporations (e.g., Lowe’s, UPS, General Dynamics, Sodexo, Verizon) and the government (e.g., USPS). Only 13% of students pursue less attractive associate degrees, while 53% and 33% pursue bachelor’s and master’s degrees, respectively.

Robust online program offering, with about 30% of students opting to take all of their classes online over the past five years. Strayer’s online success has a positive effect on margins and supports global expansion, as the online programs appeal to students regardless of location.

Attractive working adult market includes 206 million Americans aged 25+ years, 14% of whom hold no high school diploma while 50% are high school graduates but hold no postsecondary degree. The earnings gap between those with a high school diploma versus a bachelor’s degree widened from 32% in 1979 to 81% in 2012.

Silberman (55) has been a skilled capital allocator. While Strayer has brought in a new CEO, we view chairman Robert Silberman’s continued involvement as positive for long-term value creation. During his tenure as CEO, Silberman managed the company to high FCF generation while maintaining high academic standards. Despite major operating challenges, Strayer generated operating cash flow of $72 million in the first nine months of 2013. Unfortunately, it did not buy back stock in 2013.

INVESTMENT RISKS & CONCERNS

Enrollment continues to decline, dropping from 56,000 in the spring terms of 2011 to 51,000 in 2012 and 46,000 in 2013. Operating income has dropped more sharply over the same period, as operating margin has eroded. It seems impossible to predict future normalized earnings, making an appraisal of value rather speculative. That said, even under conservative assumptions, Strayer equity could be worth materially more than the recent market quotation.

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