Strayer had their quarterly earnings announcement yesterday morning and there were a couple interesting announcements. Someone asked me for a comment on the report. I listened to the call this morning and here are some notes along with my basic comment in reply…
Here are some notes:
- Enrollments for fall term 2013 decreased 17% to 43,192 (last year it was 51,727)
- Continuing student enrollment decreased 14%
- New student enrollment decreased 23%
- Revenues continue to fall—down 11% in Q3 2013
- Earnings are down 23% yoy
- Cash on balance sheet is now $85mn. They didn’t repurchase shares and let cash build throughout the quarter.
- Even with the declining revenue, the business is still quite profitable. Company produced $18mn of FCF last quarter. They continue to hold back on capex, spending only $7mn in Q3. Seem interested in protecting capital at this point.
- The 2 big announcements this quarter:
- Instituting a new 20% cut in tuition costs for new students
- Closing 20 physical locations
- This will lead to a charge of $45-$55 million in Q4 ($10mn of which is cash, the rest will be non-cash)
- These closures will affect about 2300 students, but most will be able to continue online. Management estimates that the closures will save an estimated $50mn of operating expenses annually, which is quite significant
First off, the environment remains tough for Strayer, but I wasn’t really surprised by the results in terms of sales and enrollment trends. I’m expecting some more of that in the near term. However, I was surprised (but not upset) by the announcement regarding their plans to close 20 physical locations as well as the tuition price cut.
I actually viewed this positively (maybe differently than the market). One secondary reason I own the stock (aside from it being very cheap based on cash flow) is the fact I really like the management team. It’s always difficult for management teams to shrink their territory. By nature, management wants to grow. I thought this was a prudent decision on Silberman’s part, and although it remains to be seen how this plays out, I think he’s planning way ahead, and not worried about the next few quarters, or even the next year or two.
I listened to the call yesterday, and Silberman said something to the effect of “We plan to be here 100 years from now (the company–obviously not the management team)
The stock got hit yesterday, which I found interesting. The market typically is looking ahead 2-3 quarters, and they certainly see a bleak future in that short time frame. The question is what does this look like 2-3 years and beyond. What happens if enrollments stabilize even at a significantly lower level? Management seems committed to adapting to whatever that level is. If they were stubborn with their capital allocation and investment plans, I’d think of this much differently.
Silberman mentioned numerous times that they take seriously the stewardship of shareholder capital and the decision to close the locations was because they weren’t producing adequate returns. Very few managers truly make these types of decisions (although many say they do). It is clear (to me at least) that Silberman is truly focused on creating and increasing intrinsic value per share. He’s very ROC oriented and is not worried about growth, but rather the highest and best use of shareholder capital. That’s the kind of management you want, especially in a business where capital allocation will be crucial in the next few years.
Of course, his good intentions don’t mean that the company will be successful in translating these cost cutting initiatives into value, but I think given the history of Strayer producing high returns on shareholder’s capital, they have a very good probability of success. But note: it might not be pretty in the near term.
The good news is they’ll save about $50mn per year in operating expenses, and that will mitigate some of the enrollment and revenue declines. At some point, it all comes down to stabilizing enrollment, and that is the challenge. But over time, Strayer has proven to be a business model that has worked (it’s been in business for over 100 years).
As with most stocks that are cheap, there are challenges here, but I think at these prices there remains an interesting possibility for asymmetric outcomes.
The business made $18 million in free cash flow last quarter and has produced about $65 million FCF so far in 2013 through 9 months. They are on pace to make about $85 million in free cash flow this year thanks to cutting back on their capex. They are going to take a charge in Q4 related to the closures, but the majority of the charge will be non-cash (according to management).
Even if we have another year of 25% decreases in net income, that would still leave somewhere around $65 million of free cash flow, which equates to about a P/FCF of around 6 at these prices. There is a lot of bad news priced into this stock, in my opinion.
Disclosure: Please note–I own STRA for myself and for clients. This is not a recommendation. Please conduct your own due diligence.