Foolish Forecast: Strayer-ing Upward?

School's back in session, and for-profit educator Strayer (Nasdaq: STRA  ) is, too. The company reports its Q3 2006 earnings Thursday morning, and Wall Street is nervous.

What analysts say:

• Buy, sell, or waffle? A baker's dozen of analysts follow Strayer. Seven say buy, five rate the stock a hold, and one says sell.
• Revenues. On average, analysts believe sales rose 19% to $55.8 million .
• Earnings. But that profits fell 7% to $0.41 per share.

What management says:
For the first time in more than four-and-a-half years, analysts are projecting a year-over-year decline in profits at Strayer -- but not because the business is imploding. On the contrary, CEO Robert Silberman termed last quarter's performance "strong" and advised investors to expect to see two new Strayer campuses open during Q3, including the firm's first campus in Alabama.

The reason that profits will (probably) be falling can be found in the fact that last year Strayer did not expense stock options, but this year it is expensing. As revealed in last quarter's earnings release, but for the expensing of stock options, the firm would expect to earn as much as $0.52 per share this quarter -- an 18% increase over last year.

What management does:
Rolling gross margins have grown steadily for more than a year at Strayer, and yet operating and net margins are falling. Why? Because Strayer is expanding its business by opening new campuses like the one in Alabama, and because it takes a year or so for those new campuses to begin generating operating profits. The faster it grows, the more its margins will be dragged down in the short term. Members of Motley Fool Hidden Gems can get the Fool details on how this works in Jim Gillies' write-up on Strayer.

Margins %	3/05	6/05	9/05	12/05	3/06	6/06
Gross	65.3	65.0	65.0	65.1	65.3	65.7
Op.	35.9	35.0	34.3	34.0	34.0	34.2
Net	22.7	22.3	22.0	21.8	21.6	21.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
I can't help but wonder whether the time has come for profits from Strayer's already-opened campuses to start outweighing the margin depression of its just-opened branches. Last quarter marked the first time in at least a year and a half that operating margins improved quarter over quarter (I'm talking about just the quarterly results here, not the rolling numbers.) If that's not just a one-time fluke, if we've indeed hit that tipping point, I expect investors to cheer rather loudly on Thursday as the margin trends begin to turn upward.

Competitors:

• Apollo Group (Nasdaq: APOL  )
• Career Education (Nasdaq: CECO  )
• Corinthian Colleges (Nasdaq: COCO  )
• DeVry (NYSE: DV  )
• ITT Educational (NYSE: ESI  )
• Laureate (Nasdaq: LAUR  )

For more on Strayer and its peers, read:

• Foolish Forecast: Strayer or Stayer?
• Corinthian Gets Detention
• Foolish Forecast: DeVry's First Grade

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Fool contributor Rich Smith does not own shares of any company named above.