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Strayer Education Inc (STRA), DeVry Inc. (DV): Should You Stray Away From This For-Profit Education Services Provider?

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The most profitable investment opportunities are found in industries that are perceived to be high risk. One example is the for-profit education sector which has suffered from issues relating to low enrollment rates and regulatory risks. I like

Strayer Education Inc (NASDAQ:STRA), a for-profit, post-secondary education services provider, for the way it has tackled issues like affordability and low graduation rates head on, with the aim of improving enrollment rates. Its regulatory risks are also manageable, as its cohort default rates are well below the national average. However, its peers

Strayer Education Inc (NASDAQ:STRA)
Apollo Group Inc (NASDAQ:APOL) and DeVry Inc. (NYSE:DV) look more attractive in terms of valuation and have stronger balance sheets. I will suggest that investors in the for-profit education sector avoid Strayer in favor of its peers.

The value of education and tackling issue of low enrollment

For most graduates, education helps them secure better, higher paying jobs. This importance of a Bachelor’s degree in improving your financial status becomes more relevant in today’s context. According to data from the Bureau of Labor Statistics, the disparity in compensation between an average Bachelor’s Degree holder and an average High School Diploma holder has widened from about 30% to 80% in the past three decades.

Affordability and low graduation rates are two major reasons why some students choose not to enroll in such post-secondary education institutions. Strayer Education Inc (NASDAQ:STRA) has put in place several initiatives to tackle these issues. To help prospective students with affordability issues, Strayer Education Inc (NASDAQ:STRA) recently announced that it will freeze tuition rates for all current students through 2014.

Also, Strayer Education Inc (NASDAQ:STRA) has always tasked its campus business offices to advise students on their plans for funding their education. Furthermore, it also introduced “The Strayer University Graduation Fund,” which will encourage its students to complete their degrees, and improving affordability at the same time. Under this scheme, Strayer Education Inc (NASDAQ:STRA)’s students earn a Tuition Award for every three classes they passed. Students have the opportunity to shave off about a quarter of their tuition fees, and given the Award can only be redeemed in their final year, students are ‘motivated’ to stay the full course.

Structural disadvantage of not-for-profit competitors and lower regulatory risks for Strayer

In most industries, the government-backed 800-pound gorilla tends to be inefficient and lack flexibility. There is a similar story in the education sector. The non-profit education players have a large market share of the education space, and have an advantage in funding from both the government and philanthropic contributions. However, this masks the fact that they are burdened with huge pension debts on their balance sheet and are more rigid than their for-profit counterparts in areas such as cost-cutting or admissions.

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