Best Buy's All-Inclusive Degree Program Will Attract Future Students

Key Takeaways

• Strong enrollment growth through corporate partnerships and education technology services could drive significant revenue and earnings increases.
  
• Robust free cash flow and disciplined cost management support improved net margins and enhance shareholder returns via dividends and share repurchases.
  
• New regulatory measures, increased scholarships, and economic factors may restrain growth, limit revenue, and strain profits despite strong enrollment and education technology growth.

Catalysts

Provides education services through campus-based and online post-secondary education, and programs to develop job-ready skills.

• Strategic Education is benefiting from strong enrollment growth, particularly through its corporate partnerships, which could drive continued revenue growth as employer-affiliated enrollment increased by 16% in 2024.
  
• The Education Technology Services segment is experiencing significant growth, with revenue increasing by more than 30% in 2024, primarily through the Sophia Learning direct-to-consumer portal and expanding corporate partnerships, potentially boosting earnings.
  
• The transition of the Best Buy partnership to an all-inclusive degree program at no cost to employees could lead to increased enrollment and revenue for the U.S. Higher Education segment.
  
• Strategic Education's disciplined cost management, leading to operating margin expansion by nearly 200 basis points, suggests the potential for improved net margins in the coming years.
  
• The company has a robust free cash flow, allowing it to continue shareholder returns through dividends and share repurchases, which could enhance earnings per share.

Strategic Education Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Strategic Education's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.2% today to 11.8% in 3 years time.
• Analysts expect earnings to reach $164.9 million (and earnings per share of $6.74) by about April 2028, up from $112.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2028 earnings, up from 16.9x today. This future PE is greater than the current PE for the US Consumer Services industry at 18.7x.
• Analysts expect the number of shares outstanding to decline by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.56%, as per the Simply Wall St company report.

Strategic Education Future Earnings Per Share Growth

Risks

• The potential impact of new regulatory measures in Australia/New Zealand, such as the government using visa processing times to effectively cap international student enrollment, could restrain growth in this segment and limit future revenue increases.
  
• Although U.S. Higher Education enrollment grew, the revenue per student might continue its decline due to increased scholarships and the shift toward employer-affiliated students, potentially impacting revenue growth.
  
• Higher operating expenses in the Education Technology Services (ETS) segment, despite strong revenue growth, may strain profit margins, especially as additional growth investments are required to maintain expansion.
  
• The reliance on corporate partnerships for U.S. enrollment makes the company vulnerable to changes in corporate strategy or economic downturns that might reduce employer-sponsored education programs, affecting enrollment figures and revenue.
  
• The competitive necessity to drive down overall education costs rather than increase tuition fees limits the revenue per student, impacting the ability to significantly expand revenue through price increases.

Valuation

• The analysts have a consensus price target of $112.333 for Strategic Education based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $97.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $164.9 million, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 6.6%.
• Given the current share price of $78.73, the analyst price target of $112.33 is 29.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.