Strategic Education (STRA): Is the Turnaround Real? A Contrarian’s Case for Value

The debate over Strategic Education (NASDAQ: STRA) has long been split between skeptics who view it as a "value trap" and optimists who see a turnaround in the making. After years of regulatory turbulence, enrollment declines, and margin pressures, the company’s first quarter 2025 results offer compelling evidence that the latter may finally be right. With adjusted EPS up 17% year-over-year, revenue growth of 4.6%, and a robust $57.3 million in distributable free cash flow, STRA appears to have stabilized its core operations. Yet, its shares trade at a 15.8x forward P/E—a discount to its historical average—while its stock price has underperformed the market by -39% over the past year. For contrarian investors, this presents a rare opportunity to buy a financially resilient education company at a deep discount, provided key risks are managed.

Q1 2025: A Turnaround in Motion?

The quarter’s highlights are stark. Adjusted diluted EPS rose to $1.30 from $1.11 in Q1 2024, driven by margin expansion in its high-growth Education Technology Services (ETS) segment, which saw revenue surge 45%. This segment now accounts for 11% of total revenue, up from 8% a year ago, and operates at a 40.3% operating margin, far outpacing its slower-growing U.S. and ANZ segments. Meanwhile, the company’s cash balance swelled to $197.6 million, with no debt, while share repurchases of $32 million and a $0.60 quarterly dividend (yielding ~2.5%) underscored its financial flexibility.

Yet, the story is not without contradictions. While ETS and U.S. employer partnerships (now 31.2% of enrollments) are thriving, broader enrollment trends remain fragile. Unaffiliated U.S. enrollments dipped, and ANZ’s international student numbers fell due to regulatory headwinds in Australia. Over the past five years, diluted EPS has declined by 6.6%, and return on invested capital (ROIC) remains a modest 3.7%—a red flag for capital allocators.

Why Contrarians Should Look Beyond the Headlines

The skeptics’ case is clear: STRA operates in a sector under siege. Rising competition from public universities, credential inflation, and regulatory scrutiny over for-profit education models have eroded confidence. The company’s own history—revenue declines in 2023, margin volatility, and a -39% stock price drop in 2024—adds to the narrative of a fading business.

But the contrarian sees something different. First, the 15.8x forward P/E is a bargain for a company with $57 million in distributable free cash flow and $197 million in cash. At current prices (~$24/share), STRA’s valuation implies little optimism about its future. Second, the ETS segment—driven by Sophia Learning’s 37% subscriber growth and Workforce Edge’s 78 corporate agreements—is a scalable, high-margin engine. If this segment can grow to 20% of revenue within two years (up from 11% today), it could meaningfully lift ROIC and EPS.

Third, the company’s balance sheet is a fortress. With no debt and a dividend that has been raised consistently over the past decade, STRA offers downside protection. Even if revenue grows only mid-single digits annually, the dividend alone provides a 2.5% yield, while share repurchases could amplify EPS growth further.

Risks That Could Derail the Turnaround

The case for STRA is not without risks. Enrollment declines in ANZ—where revenue grew just 1.9%—reflect deeper structural challenges. Australia’s regulatory focus on domestic enrollments may limit growth there indefinitely. Meanwhile, U.S. unaffiliated enrollments remain vulnerable to economic headwinds, as students prioritize affordability.

The company’s ROIC of 3.7% also raises concerns. To justify its valuation, STRA must prove it can boost returns to 10%+—a level consistent with its ETS margins. If the ETS segment’s growth falters or capital spending spirals, this could remain elusive.

The Contrarian’s Bottom Line

Strategic Education is a paradox: a company with a tarnished reputation but improving fundamentals, trading at a valuation that ignores its cash flows and dividend. The 15.8x forward P/E and $0.60 dividend create a compelling entry point for investors willing to look past short-term enrollment headwinds. The ETS segment’s momentum, coupled with a fortress balance sheet, suggests the worst may be over.

However, this is not a "set it and forget it" investment. Success hinges on three tests:
1. Can ETS’s growth outpace capital expenditures, boosting ROIC?
2. Will U.S. employer partnerships offset unaffiliated enrollment declines?
3. Can ANZ stabilize its revenue despite regulatory shifts?

For now, the Q1 results suggest STRA has passed the first hurdle. The others remain open questions—but at this valuation, the upside for a contrarian investor outweighs the risks.

Final Call

Strategic Education is a stock for investors who believe in second acts. With a 15.8x P/E, a 2.5% dividend yield, and a management team executing on its tech-driven growth strategy, STRA offers a rare chance to buy a turnaround story at a deep discount. The risks are real, but so is the reward. For the contrarian, this is a Buy at current levels.