STRA — Strategic Education, Inc. · 2026-09-10 · Verdict: IDEA · Conviction 3
Price $81.44 (screen close 2026-09-09) · Mkt cap $1.81B · EV $1.67B · EV/normalised after-tax profit 11.5x · FCF yield 9.3% · Net cash $133.8M · ADV $19.3M Sources read: 10-K 2026-02-27 (Items 1, 1A, 7), 10-Q 2026-07-29 (Item 2), DEF 14A 2026-03-11, 8-Ks 2026-04-23 and 2026-07-29 (Item 2.02), Form 4s (trailing 12m), Q2 2026 earnings release EX-99.1 2026-07-29. No call transcript or prepared remarks were filed as an exhibit, so no management Q&A was available.
Desk stats - Revenue trend: FY2025 revenue $1,268.2M, up 4.0% (10-K 2025, Item 7); Q2 2026 revenue $337.3M, up 4.9% but only 2.7% in constant currency (Q2 2026 release). The driver is price and mix, not volume: USHE average enrollment fell 1.4% in 2025 and 0.5% in Q2 2026, ANZ fell 1.8% and 5.2% (10-K 2025; 10-Q Q2 2026, Item 2). - Normalised after-tax operating profit: TTM to 30 June 2026 GAAP income from operations is $180.2M ($174.2M FY2025, less $85.6M H1 2025, plus $91.6M H1 2026). One adjustment is added back, the $13.9M ANZ back-pay reserve booked in Q2 2026 for casual academic marking hours covering 2020 to 2025 (10-Q Q2 2026, Recent Developments). Restructuring of $21.8M TTM is deliberately not added back: it has run every year since 2023 ($16.3M, $1.6M, $21.9M, $4.6M in H1 2026). Normalised operating profit $194.1M against $180.2M GAAP; taxed at the desk's 25% that is $145.6M (at the company's own 29% adjusted rate, $137.8M). - EV / normalised after-tax profit: 22.209M shares at $81.44 = $1,808.7M, less $133.8M cash and marketable securities, no debt drawn on the $250M revolver (10-Q Q2 2026, Liquidity), so EV = $1,674.9M and the multiple is 11.5x (12.2x at a 29% tax rate). - Leverage: net cash of $133.8M, so net debt / normalised EBITDA is about -0.5x on roughly $244M of normalised EBITDA. Undiscounted lease commitments of $135.4M (10-K 2025, Item 7) are the only meaningful fixed obligation. - Is the growth sustainable? Organic and cash-backed but thin. Enrollment is shrinking in two of three segments; all the growth is Education Technology Services, up 41.4% in FY2025 and 15.4% in Q2 2026. No formal guidance is given. - What the screen got wrong: it used $123.8M of cash and missed the marketable securities, understating net cash by about 24% against the $153.1M reported at 31 December 2025. It also runs on FY2025, so it sees neither the Q2 2026 reserve nor the H1 2026 margin gain; on TTM data the multiple is 11.5x, not the 12.7x on the screen row.
1. What the business actually does
SEI sells degrees to working adults through three segments (10-K 2025, Item 1). U.S. Higher Education is Capella and Strayer Universities, 85,306 students in the 2025 fall term, about 70% aged 31 or older and 72% part-time. Australia/New Zealand is Torrens University, the only investor-funded university in Australia, plus Think Education and Media Design School. Education Technology Services is the interesting one: Workforce Edge administers tuition-benefit programmes for 81 corporate partners covering roughly 4.02 million employees (Q2 2026 release), and Sophia Learning sells low-cost, credit-recommended general education courses on subscription. Tuition is 94% of revenue.
2. Why it is mispriced — the edge case
Not neglect. ADV is $19.3M and BlackRock (15.8%), Vanguard (11.4%), T. Rowe Price and Marshfield all hold size (DEF 14A 2026). The edge case is a misunderstood segment inside a declining headline. A screen sees total enrollment falling and prices a shrinking for-profit college. What is happening is a mix shift into ETS, which earned a 46.2% operating margin in Q2 2026 on 15.4% revenue growth (Q2 2026 release) and produced $58.8M of FY2025 segment operating income, about 30% of the $196.1M consolidated adjusted total (10-K 2025, Item 7). Value ETS at 20x segment EBIT, USHE at 8x and ANZ at 7x and you reach roughly $2.24B before net cash, against an EV of $1.67B. The same mix shift fixes the regulatory problem in section 8, because employer-paid tuition is non-federal revenue; Title IV per credit earned is down 5.9% on a trailing four-quarter basis (10-Q Q2 2026).
3. Unit economics and growth
FY2025 operating margin was 13.7% GAAP and 15.5% adjusted, up from 12.8% and 12.9% in 2024 (10-K 2025, Item 7). Q2 2026 was 15.0% GAAP while absorbing the $13.9M reserve. Q2 2026 segment margins: ETS 46.2%, USHE 14.7% (from 9.6%), ANZ 1.3% and about 19% before the reserve. USHE trailing four-quarter persistence hit 89.0% in Q1 2026, an eight-quarter high against 86.9% in Q1 2024 (10-Q Q2 2026). Bad debt fell to 3.3% of revenue from 4.0%. TTM operating cash flow is about $215.9M against $47.3M of capex, so free cash flow is roughly $168.6M, a 9.3% yield on market cap and 1.16x conversion of normalised NOPAT. Reported ROIC is only about 9.8% because $1.26B of goodwill and $0.25B of intangibles from the Torrens purchase sit in the capital base; on tangible operating capital returns are far higher, and that gap prices the prior board's acquisition, not the operating business.
4. Balance sheet and capital allocation
No drawn debt, revolver undrawn and in covenant compliance (10-Q Q2 2026). Shares outstanding fell from 22,968,860 at 31 December 2025 to 22,208,559 at 30 June 2026; diluted weighted average shares fell from 23,516k to 21,736k year over year in Q2. Buybacks were $138.9M in 2025 against $11.5M in 2024, plus $72.7M in H1 2026, with $140.7M of authorisation left through December 2026. The dividend is $0.60 quarterly, $57.5M paid in 2025. Together roughly $200M a year is returned on a $1.81B market cap. Insiders are marginal net sellers: one open-market purchase of 665 shares at $72.71 by director Michael Thawley on 2026-04-24 against 2,666 shares sold, net about -$163K (Form 4s, 12m). CEO equity grants carry a four-year cliff and are conditioned on maintaining accreditation and not breaching 90/10 (DEF 14A 2026).
5. Management: what they said versus what they did
SEI gives no guidance, so there is nothing to score against. What can be scored is the non-GAAP table, and here management passes a test most would fail: the $13.9M ANZ reserve is not excluded from adjusted operating income, adjusted net income or adjusted EPS in either the 10-Q or the release. Only restructuring, partnership investment results and discrete tax items are adjusted. The goodwill disclosure is similarly specific, giving 17% headroom on the ANZ reporting unit and 14% on its trade name in the 2024 quantitative test (10-K 2025, Item 7).
6. Valuation
TTM adjusted diluted EPS is $6.54 as reported ($6.18 FY2025, less $2.82 H1 2025, plus $3.18 H1 2026), or about $6.99 excluding the after-tax reserve. At $81.44 that is 11.7x, or 10.8x net of $6.02 per share of cash. Base (55%): revenue compounds 3.5% as ETS growth and price offset flat-to-down enrollment, adjusted operating margin drifts to 16%, buybacks retire 5% of shares a year, giving about $8.10 of adjusted EPS in 2028 at 13x, roughly $105. Bear (25%): a gainful-employment or OBBBA accountability metric costs a programme, ANZ caps bite and the $510.3M of ANZ goodwill is written down, EPS stalls near $6.50 at 8x, roughly $55. Bull (20%): ETS reaches $250M of revenue at mid-40s margins by 2028, USHE stabilises on 89% persistence, share count falls below 19M, EPS near $9.50 at 16x, roughly $145. Probability-weighted value is about $99, some 22% above the price, plus a 2.9% dividend. Reverse DCF: an 11.5x multiple is an 8.7% unlevered earnings yield, so at a 10% cost of capital the current price implies about 1.3% nominal growth in perpetuity, for a business that grew revenue 4.0% last year and normalised operating profit faster.
7. Catalysts and timeline
Q3 2026 results in late October should show whether USHE enrollment turns positive against an easy comparison and whether ANZ declines keep narrowing, as they did in Q4 2025. The Australian international student cap is expected to rise in 2026 (10-K 2025, Item 7). The High Court Special Leave decision on the Torrens appeal would resolve or enlarge the back-pay exposure. Final OBBBA accountability rules are due July 2026 and gainful-employment rules July 2027.
8. Risks and pre-registered kill criteria
The specific risk is 90/10. Strayer University derived 89.64% of cash-basis revenue from federal education assistance in FY2024, against a 90% cap that ends Title IV eligibility if breached in two consecutive fiscal years (10-K 2025, Item 1A). Capella at 67.88% is comfortable. The ETS mix shift pushes the ratio the right way, but the margin is a third of a percentage point. 1. Strayer's disclosed 90/10 ratio exceeds 90.0% in any fiscal year. 2. USHE total enrollment declines more than 3% year over year in two consecutive quarters. 3. The ANZ back-pay reserve is increased by more than $10M, or a goodwill impairment is recorded against the $510.3M ANZ reporting unit. 4. Trailing twelve-month buybacks fall below $50M while the share count stops declining.
9. Verdict and one-paragraph summary
IDEA, conviction 3. Strategic Education is a debt-free, cash-generative education company priced as a melting ice cube because total enrollment is shrinking, while the earnings mix shifts quietly toward Education Technology Services, which grew revenue 15.4% at a 46.2% operating margin in Q2 2026 and now supplies about 30% of segment operating income. At $81.44 you pay an enterprise value of $1.67B, or 11.5x $145.6M of normalised after-tax operating profit once the one-off $13.9M Australian back-pay reserve is added back and the chronic restructuring charge is honestly left in the cost base. That multiple implies roughly 1.3% growth forever, against a business whose $169M of free cash flow funds a 2.9% dividend and buybacks that cut diluted shares 7.6% year over year, and whose persistence metric just reached an eight-quarter high of 89.0%. Conviction is 3 rather than higher because this is a liquid, widely held, covered stock trading 6% off its 52-week high with no forced seller and no insider buying beyond one $48K director purchase, so the thesis rests entirely on the market undervaluing the ETS mix shift, and because Strayer sits at 89.64% against a 90% federal revenue cap that would be existential if breached twice. Probability-weighted value is about $99.
Research for discussion, not investment advice. Positions and sizing are the reader's decision.