Wednesday, November 19, 2008

Stay away from Strayer?

Strayer Education (STRA 214.95) is just a smidge off of it's 52 week high of 224, and up from it's low of 162 only last month. This is another stock being propped up by Wall Street, where they convinced management to buy back their stock at ridiculous "bargain" prices of 40X earnings and 10X revenue.

Institutions are desperate to own a winner, so they have accumulated over 100% of the outstanding shares. Last year, Sears Holdings was deemed a big winner under the genius of Eddie Lampert, and institutions owned over 100% of it's shares outstanding.That didn't work out so well. Wall Street also convinced management of a fertilizer company to spend their cash buying back stock when it was 110 points higher. They did the same to a certain organic grocer at 60 that is now trading less than 10. Could the same happen here?

Strayer charges about $14,000 a year for tuition, and about 2/3 of their students have Title IV government loans, with most of the rest getting employers to foot the education bill. Maybe that works in a good economy, but isn't there some risk to their model in these trying economic circumstances? Especially at over 40X earnings? Has student loan lending dried up because it is such a good business? And will these magnanimous employers keep paying these tuition bills for their employees in this business environment?

Strayer methodically raises tuition prices every year. But colleges are now considering lowering tuitions:

Are colleges and universities capable of lowering their expenses so that students’ bills, if not reduced, at least don’t increase faster than inflation?

They may be about to find out, especially in the public higher-education sector, where state governments are already pinched between declining tax revenues and increasing demands for spending on everything else.

In Strayer's annual report, they talk about buying back stock when it is below it's intrinsic value. Strayer said their model lacks mathematical and scientific precision, but shareholders should rest assured that their Board of Directors engages in a thorough review of that calculation.

The board of directors is preaching to the choir, and buying back stock at $218 is a waste of shareholder money.

Especially when the stock broke down last month, and is rolling over on the charts.

Sell it to management with their "intrinsic value" calculations. If they want to waste shareholder money by buying over-priced paper, let them take some stock off of your hands.

After all, can anybody name one shareholder buyback this year, by any corporation, where the buyback was done at a price lower than the current stock price?

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