Is Strayer Education Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Strayer Education (NASDAQ: STRA  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Strayer's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Strayer's key statistics:

STRA Total Return Price Chart

STRA Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth >30%

(7.4%)

Fail

Improving profit margin

(52.5%)

Fail

Free cash flow growth >Net income growth

(39.6%) vs. (56.1%)

Pass

Improving EPS

(44.8%)

Fail

Stock growth (+ 15%) <EPS growth

(75.5%) vs. (44.8%)

Pass

Source: YCharts. * Period begins at end of Q2 2010.

STRA Return on Equity Chart

STRA Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

85.3%

Pass

Declining debt to equity

Raised in 2011

Fail

Dividend growth >25%

33.3%

Pass

Free cash flow payout ratio <50%

33.2%

Pass

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
Strayer earns more passing grades today than might be expected for a stock that's fallen so far. The for-profit educator earned five out of nine possible passing grades, but two of those were granted more because of a technicality than because the company is showing real improvement. A major debt raise in 2011 also cost it a failing grade. Let's dig a little deeper to find out what Strayer is doing to right this listing ship.

Strayer's revenue and income both declined by double-digit percentages year over year in its latest quarterly report, which is never a good sign. However, these figures exceeded analyst expectations -- but in this case, that didn't stop its stock slide from picking up steam. Strayer's management blames an ongoing slowdown in student enrollment, which has seriously affected the entire for-profit education sector. Fool contributor Jeremy Bowman notes that the apparent decline in enrollment might be blamed at least in part on an ongoing Obama administration offensive against the industry's student-loan practices.

Other for-profit schools such as Apollo Group (NASDAQ: APOL  ) and ITT Education (NYSE: ESI  ) have been likewise unable to insulate themselves against the continuing turmoil. Apollo's new student enrollments fell by more than 15% year over year, while total student enrollment is more than 14% lower than it was in 2012. Fellow Fool Brian Stoffel points out that 91% of Apollo's revenue comes from the U.S. government, which exceeds the 90/10 rule set out by the Department of Education. ITT's total student enrollment and new student enrollment both tanked (17% and 14%, respectively) due to a rumor that SEC has launched an investigation into the company's PEAKS Private Student Loan program.

According to the National Student Clearinghouse Research Center, total student enrollments on campuses across the U.S. declined about 2% year over year. For-profit education has thus far felt the worst of this drop, but if it's not reversed, there may be little hope for the sector to turn its troubles around.

Putting the pieces together
Today, Strayer has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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