Moat Report Card: Strayer Education

In the moat report card series, we test for the presence of a moat by analyzing the return's a company generates on the funds it invests – its ROIC.

1. Over time, has the company earned a sufficiently high ROIC?
2. Is the ROIC of high quality?
3. Is the company maintaining and growing the returns it earns on invested capital?

For a full explanation of the score card, click here.

Here is a look at Strayer Education's (Nasdaq: STRA) returns on capital to help us assess its moat.

ROIC history
Let's see how Strayer's three-year rolling ROIC has changed over time and in relation to its nearest competitor: Apollo Group (Nasdaq: APOL):

Data from Capital IQ, a division of Standard and Poor's.

Strayer Education operates 71 for-profit universities, primarily on the East Coast, under the Strayer University brand. It offers its students the ability to take classes online or in a classroom at hours more convenient for working adults. The company has smartly racked up huge rolling returns on capital since 2004. With all this extra cash, Strayer can afford to build new campuses, pay a dividend, and repurchase shares.

Needless to say, Strayer's ROIC aces our 10% test, but is amazingly dwarfed when compared with the returns generated by Apollo (operator of the ubiquitous University of Phoenix franchise). Apollo's size and scale advantages help it earn higher returns than Strayer.

ROIC quality
Just like return on equity, there are only so many ways a firm can juice its ROIC. The three levers are profit margins, asset turnover, and leverage. Here is the data for Strayer:

Data from Capital IQ, a division of Standard and Poor's.

Strayer has been a model of consistency, generating average after-tax operating margins of 20% as it grows its business. It has maintained its efficiency as well, increasing asset turnover and operating returns on assets. If we apply industry standard leverage to Strayer's operating performance, the gap between the returns Strayer generates and the returns its competitors generate widens. This sort of performance moves Strayer to the head of the class and earns it 5 out of 5 for ROIC quality.

Data from Capital IQ, a division of Standard and Poor's.

Strayer's ROIC growth has been impressive. Rolling returns on capital have grown by greater than 25% in each of the past five years. Its average growth rate has exceeded Apollo's by 60%, and Strayer has been able to close the ROIC gap. But Strayer's gains have come at the expense of more than just Apollo.

As other companies in the for-profit education industry -- namely Career Education (Nasdaq: CECO) and Corinthian Colleges (Nasdaq: COCO) -- struggle with enrollments, quality of education, and cohort default rates, Strayer has been getting stronger each year. As a result, the company once again earns high marks: 10 out of 10.

Pencils down!
With all the numbers in, here's how Strayer scored:

While companies like Strayer, Apollo, Corinthian and Career Education operate in an industry that is under regulatory pressure, there is no denying the attractive economics of the business. And Strayer, with its A- grade, is the best-managed among them. Short interest remains high in this industry, and a focus on cohort default rates continues to generate buzz. Nevertheless, Strayer Education's summa cum laude performance may be evidence of a competitive advantage.

With the regulatory landscape uncertain, remember to look forward and assess whether the company's moat is enduring, buy at a reasonable valuation, and your portfolio will stand a better chance of surviving the scratches and flesh wounds that the market dishes out.