Monday, April 16, 2012

Strayer 2011 Annual report

Here are items of interest in Strayer annual report.

1. CEO opened the annual letter with a direct reference to bad news (lower enrollment and lower eps) and that shows that CEO is candid and we can be confident of his other statements.

2. It is likely 2012 will also be lower student enrollment. This is because lowere enrollement in 2011 will likely show up for 2.5 years at least even if enrollment improves.

3. CEO states that even with lower level of enrollment, the firm is strongly profitable. Further, Strayer is planning to expand 8 new locations (92 colleges to 100 colleges) demonstrating it's confidence. From annual report, the following lines justifies the new openings in the face of declining enrollment.
" But the key point is the returns on our investments in expanding
Strayer University are acceptable, indeed attractive, even
at this depressed level of new student enrollment."

4. Purchase of Jack Welsh institute is positive moving forward especially Jack Welsh choosing Strayer is positive.

5. The DOE regulations are out. CEO is comfortable about complying with "gainful employment" provisions though it is complex and another piece needs to come out in 2012 to know what data set is used. In essence, some risks remain but risk of significant additional damage is low. It does reduce profitability going forward for the industry. The company needs to meet one of two criterions (12% income to debt of graduating members or 35% paying back principal.).

6. Company borrowed and repurchased stock at around $128 per share. Currently the share price is $85. The dividend yield (4.5%) on share is more than the after tax interst expense (3.6%) on debt and in essence justifies share repurchase. The share price being lower now is not great but we can only evaluate if mgmt purchase is meaningful at that time even if it share price went lower later.

7. The dividend payout is around 40 to 45%. The share repurchase will increase per share dividend. This company is very savvy about capital allocation. Hence with current dividend (4.5%) not at risk, it seems a reasonable purchase to increase weight in portfolio.

8.Company plans to open 8 new camuses. It willstill have lower eps in 2012 because of lower enrollment in 2011 taking it's toll for 2 or so years. If enrollment improves, this is a huge winner. If enrollment does not improve, it can be profitable and dividend provides some protection. Still, some additional bad news is possible including lower eps.

9. The pricing increase of 3% in the face of adversity is showing strength of business.

10. It is difficult to calculate the eps at the end. eps at the end of 2011 is $8.8 per share. If 20% drop in eps, then eps will be $7.04. Adding a 12 p/e, it will be $85. This is really a low end of outcome and if likely outcomes over new few years could materially change and until then dividend yield and new campuses provide support.

11. The CEO thinks that the potential market (post secondary working adults) is huge and hence sees no saturation. With lesser new investment dollars coming into this field, Strayer may do ok.

12. Further, CEO has 200,000 restricted stock vested by 2019. So, CEO has vested interest. In current value, it is close to $20 million and CEO salary is around $600,000 and is not a pocket change.