School's out for the summer, but a for-profit educator's work is never done. Strayer (NASDAQ:STRA) reports its Q2 2006 earnings tomorrow morning.

What analysts say:

  • Buy, sell, or waffle? Eleven analysts follow Strayer. Six say buy, four rate the stock a hold, and one says sell.
  • Revenues. Analysts believe sales rose 18% to $65.4 million in the second quarter ...
  • Earnings. ... but that profits rose only 9% to $0.93 per share.

What management says:
CEO Robert Silberman called the firm's first-quarter results "solid" and expressed confidence going forward based on "strong" student enrollment for the spring semester and the continued opening of new Strayer campuses. In Q1, Strayer opened two new campuses in Pittsburgh, and Silberman noted that two more campuses -- one each in Norfolk, Va., and Atlanta -- were slated to open in Q2.

What management does:
The firm's production of cash profits backed up Silberman's optimism. In Q1, Strayer generated $21.6 million in free cash flow -- markedly better than the $16 million in "accounting profits" reported under generally accepted accounting principles. And no sooner had the cash come in, than Strayer returned it to shareholders in the form of share buybacks -- spending $14 million to repurchase 143,800 shares during the quarter.

Speaking of GAAP results, rolling gross margins at last report were holding strong at their year-ago levels. However, the campus-expansion efforts ate away at operating and net margins a bit.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

65.1

65.3

65.0

65.0

65.1

65.3

Op.

35.7

35.9

35.0

34.3

34.0

34.0

Net

22.5

22.7

22.3

22.0

21.8

21.6

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:
Although actively discussed on our message boards, and written about with increasing interest by Fool co-founder Tom Gardner, Strayer has not yet been promoted from the level of "Watch List stock" in our Motley Fool Hidden Gems newsletter.

That said, Hidden Gems member Robert628496 has done a bang-up job keeping tabs on the company for us, and Hidden Gems team member Jim Gillies wrote a detailed report on the company, recently published in our daily online update on the stocks we follow for the portfolio. Jim confirmed my suspicion that the new campuses are responsible for holding back Strayer's operating margins, but for a reason other than what I initially suspected: campus-opening costs. Digging deeper into the financials, Jim advises us that Strayer's new campuses "typically run operating losses of $1 million in the first year, turning an operating profit after four to six quarters." Thus, it may be a few quarters more before we begin to see the trend reverse.

Competitors

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

Yes, you read that right. We really do update you on important developments at our Hidden Gems stocks every single day. It's one of the most important features -- but only one of them -- setting Hidden Gems head and shoulders above competing "stock newsletters." See why we're so proud of this aspect of the service, and do it on our dime by signing up for a free trial right now.

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