After having more than halved since the pre-Covid (February 2020) level, at the current price of $84 per share, we believe Strategic Education stock (NASDAQ: STRA) is undervalued. Strategic Education is an education services company that provides a path between learning and employment through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. The stock has declined from $174 in February 2020 to $84 as on 2nd November 2020. The stock is currently down 27% from its March level of $115. This compares unfavorably to the S&P 500 which is up 48% during the same time. The stock has underperformed the market because of the uncertainty surrounding the education sector and timeline of when and how functioning of the universities will get back on track. However, as the lockdowns are gradually lifted and the enrollment ratio goes up, the company’s revenue and earnings are expected to improve in 2021. Along with a positive outlook, the fact that the stock currently is close to a 3-year low, we believe that it has the potential to rise by as much as 80% as the crisis abates. Our dashboard What Factors Drove -6% Change In Strayer Education Stock Between 2017 And Now? provides the key numbers behind our thinking.
The stock price rise between 2017-2019 is justified by an almost 120% increase in revenue during this period. The sharp rise in revenue was driven by the merger with Capella Education Company in August 2018. Additionally, in the Strayer University segment, the enrollment grew during this period, leading to improvement in top line. On a per share basis, revenues increased 7.7% between 2017-2019 as the shares outstanding also went up significantly from 10.7 million to 21.7 million due to the merger. With the rise in revenues, the company’s P/S multiple increased from 2x to 3.5x as the rise in stock price was more than revenue growth. However, the P/S multiple dropped sharply in 2020 as universities were shut following the outbreak of coronavirus. The multiple currently trades a little below 2x.
Where is the stock headed?
The outbreak of coronavirus in early 2020 led to a complete shutdown across major economies. Home confinement meant universities also being closed temporarily, thus affecting education service providers. However, with online learning receiving a boost in the last few months, this avenue has helped mitigate the impact of the crisis on the company’s top line. This is reflected in the Q2 results where STRA’s revenues increased 4.3% y-o-y. Also, earnings increased 29% due to lower instruction and support costs.
The gradual drop in the growth rate of positive cases in the last few months, along with lifting of lockdowns boosted investor confidence. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. However, the recent spike in Covid-positive cases over recent weeks is a cause of concern for the company, as a major rise in cases could increase fears of another lockdown. In such a case, the expected recovery will be pushed ahead and the stock will see a further drop. In the absence of another lockdown, it is expected that offline education will also gradually get back on track over the next few months, while online education will continue to perform strongly. Though the enrollment is likely to remain low in the near term, the opening up of the economy will drive up the enrollment in courses over the next few quarters. The company is likely to see modest growth in its revenue and earnings in 2021, and with investors’ focus having shifted to 2021 numbers, the P/S multiple is likely to go back to its 2019 level of close to 3.5x. As the crisis abates, Strategic Education’s stock could shoot up to $150, reflecting a potential upside of around 80% from its current level.
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