For-profit education companies have come under scrutiny over the past couple of years due to their low graduation rates and students being unable to find gainful employment upon graduating. In response, the government is trying to implement the "gainful employment" rule.
The rule would effectively cease government money to for-profit education companies if their graduates finished their programs having high percentages of student loan debt compared to their incomes. Thankfully for the education companies, the implementation of the rule has faced hurdles and was blocked in 2012 by a lawsuit from the for-profit education industry. Apollo Education Group (NASDAQ:APOL) has faced significant problems adhering to government rules, but not all of the for-profits are alike. Strayer Education (NASDAQ:STRA) has proven itself an asset for those seeking a good education while taking the necessary steps to reform itself.
Time for change
Following the boom in people returning to school during the recession, Strayer implemented a necessary restructuring program to make it viable. The restructuring, commenced in the company's 2013 fourth quarter, is intended to reduce its yearly operating costs by $50 million. Strayer closed twenty of its under-performing locations in the Midwest and transitioned some of those students to online offerings--doing so eliminated the associated upkeep expenses of the buildings and Strayer's fixed lease costs.
Although it is restructuring, Strayer maintains its popular programs such as its MBA degree through the Jack Welch Management Institute, which it acquired in 2011. Its MBA program should prove beneficial as education in business and more quantitative programs becomes more important in a global environment.
Strayer avoids the pitfalls of its competitors
Unlike some of its competitors such as Apollo(NASDAQ:APOL), Strayer avoids coming close to the "90/10" rule. The 90/10 rule is a stipulation in the Higher Education Act that education institutions cannot generate over 90% of their revenue from government loans and grants. Violating the 90/10 rule for two years in a row is quite punitive as guilty institutions are barred from getting education funds from the government. Strayer derived 74% of its revenue from government funds in 2012 and 76% in the previous year. Its percentage for 2013 had not been calculated and audited as of writing. Apollo, on the other hand, generated 91% of its revenue from government funds in 2012 and 90% in 2013, putting it in dangerous territory.
Strayer's recent financial results and positioning
The company generated earnings per share of $1.55 on $504 million of revenue in 2013 and is undervalued according to traditional valuation metrics. A five-year PEG ratio under one signifies that a company is undervalued. The ratio divides the company's price-to-earnings value by its 5-year growth rate. Strayer's five-year PEG is currently 0.89. In sharp contrast, Apollo's is 1.94, more than doubling Strayer's PEG.
Additionally, Strayer's stock sells for less than the amount of sales it currently generates with a P/S of 0.89. Apollo was slightly more expensive with a P/S of 0.98, but still less than one. Strayer's return on assets was just short of 23% over the last twelve months and its return on equity was a little over 41%. Apollo's numbers were also good but less than Strayers' at 14% and 19%, respectively, over the last twelve months. Further, Strayer remains incredibly liquid with a current ratio of 2.82, signifying that it has ample assets to meet its obligations in 2014. Apollo's current ratio is half that at 1.4. It is also important to note that Strayer generated more cash flow from operations in 2013 than it did in 2012, $84.1 million versus $82.1 million. Its decrease in earnings was mainly a result of non-cash charges for its restructuring.
Strayer going forward
Strayer is making the necessary changes to survive in an increasingly scrutinized and competitive education industry. Its restructuring should help the company continue to educate business professionals and others looking to advance. The company also maintains a good reputation and has a valuable asset with the Jack Welch Management Institute. It has also avoided the ire of government regulators up to this point. Strayer should be a solid investment for those seeking a financially strong education company.
Andrew Sebastian has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.