Strayer Education, Incorporated: An Equity Valuation

By Stotler, James | Journal of the International Academy for Case Studies, July-August 2008 | Go to article overview

Strayer Education, Incorporated: An Equity Valuation


Stotler, James, Journal of the International Academy for Case Studies


CASE DESCRIPTION

This case will require the student to value the equity of Strayer Education, Incorporated, (NYSE:STRA) and make a buy or sell recommendation as an independent analyst. The data given should be examined to determine whether or not the company's stock is valued above or below the market price in order for investors to make a buy or sell decision. The student must assess the real estate industry environment using Porter's five-force model of competitive strategy and the DuPont identity. Valuation techniques employed include the capital asset pricing model, the two-stage dividend-discount model, the P/E valuation approach, and the Gordon model.

CASE SYNOPSIS

The student is placed in the role of an equity analyst and asked to prepare a buy or sell recommendation for Strayer Education, Incorporated(NYSE:STRA) stock. Strayer Education, Inc. through its subsidiary, Strayer University, offers graduate and undergraduate degree programs in business, information technology, education and public administration. The student must assess the competitive environment of Strayer using the DuPont identity and Porter's five force model of competitive strategy as well as estimate the value of the stock. All information in the case is publicly available.

INSTRUCTORS' NOTES

Pedagogy

The valuation of the common stock of Strayer Education, Incorporated, the holding company operating Strayer University, is the focus of this case. The student must remember, however, that they are to interpret the case from the perspective of an external analyst or investor. Implementation of processes that address industry concerns through Porter's Five Force Model and the usage of the DuPont identity will identify the company's strength and weaknesses among its competition. The difficulty level of the case is appropriate for seniors or first year graduate students. The case should take a maximum of two hours of class time and two and one-half hours of student preparation outside of class.

Stock evaluation issues relating/but not limited to the following are to be discussed:

* the expected return

* risk-free rates

* security's beta

* discount rate

* growth rates

Teaching Plan

Class discussion should be initiated with the students identifying Porter's five competitive forces and the strength of these pressures. Instructors may want to focus on the following topics for class discussion.

1. List and describe the sources and strengths of the five competitive forces.

2. Analyze the ROE, Profit Margin, and ROA using the DuPont identity.

3. Calculate the expected return for STRA stock.

4. Estimate the value for STRA stock using the constant growth model.

5. Determine the value estimate using a Price/Earnings valuation approach.

6. Find the value estimate for STRA using the two-stage Dividend Discount Model.

7. Present an overall external investment recommendation to buy or sell the stock based on your analysis. Explain.

1. List and describe the sources and strengths of the five competitive forces.

* Threat of entry by new competitors

* Threat of substitute goods

* Bargaining power of buyers

* Bargaining power of suppliers

* Rivalry among existing competitors

Threat of entry by new competitors

Competition in this industry could be evaluated in two ways. It could be viewed as just other publicly traded for-profit educational services corporations. In this case, the threat of entry by new competitors would be quite high, particularly in the online sector since the entry costs would be much lower. The threat of new competitors is somewhat less in the campus based area, but it is still significant since it is common in the industry to lease instructional space (typically in a local office complex). …

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