Activist Jeff Ubben thinks the market is unfairly undervaluing Strategic Education because it is a for-profit education company.
His company, Inclusive Capital, has a stake of more than 5% in Strategic Education. Since the beginning of June, the stock is down more than 40%, while the S&P 500 is up more than 12%.
For-profit education companies have gotten a bad rap in recent years, but Ubben thinks Strategic Education can deliver strong returns by leveraging its technological capabilities. In addition, the company has taken initiatives to reduce the costs of post-secondary education.
Company: Strategic Education Inc. (STRA)
Company: Strategic Education is a profitable education services company that offers post-secondary education and other academic programs through its subsidiaries, Strayer University, New York Code and Design Academy (NYCDA), and Capella Education Company. As of December 31, 2019, the university offered 53 degree programs with 128 graduate and undergraduate specializations in business administration, accounting, information technology, education, nursing, public administration and criminal law in 77 physical campuses in the mid-Atlantic and southern regions of the United States and online. The university also offers an executive Master of Business Administration online through the Jack Welch Management Institute. NYCDA offers non-degree courses in web and application software development primarily on campus in New York City. Capella offers post-secondary education and vocational skills programs.
Stock market value: $ 2.3 billion ($ 94.78 per share)
Activist: Inclusive Capital
Percentage ownership: 5.65%
Average costs: $ 114.88
Comment activist: Inclusive Capital Partners was founded in 2020 by ValueAct founder Jeff Ubben to use capitalism and governance in the pursuit of a healthy planet and the health of its residents. The company is committed to long-term shareholder value by actively partnering with companies whose core businesses provide solutions to this endeavor. Inclusive is a return-oriented fund with a focus on ecological and social investments. Their primary focus is on creating environmental and social value, which leads to shareholder value creation. Inclusive is a $ 1.5 billion fund that has 10 – 12 companies in its portfolio. It is the successor to the ValueAct Spring Fund, which was launched in January 2018 and will be merged into Inclusive in 2020. Inclusive is building an enormous network and has gained access to experts in sectors such as energy, electrification, water, agriculture, food production, particulate matter, education and human rights. Like ValueAct’s constructive, patient investment style, Inclusive strives to earn the trust of managers, board members and institutional investors. Ubben serves as the portfolio manager and Eva Zlotnicka as vice president. Zlotnicka already has a relationship with ValueAct through their interactions with Morgan Stanley, where she served as Vice President and US Head of the Global Sustainability Research Team. At Morgan Stanley she worked to help address and raise awareness of environmental and social issues both within and outside companies.
What is going on
Inclusive reports a position of 5.65% in Strategic Education for investment purposes.
Behind the dcenes
Inclusive (through its predecessor, ValueAct Spring Fund) first announced its position in the company on April 27, 2018, when Ubben expressed his belief that the company will thrive thanks to its technology capabilities. The ValueAct Spring fund has since merged with Inclusive, but many of the key investment principles that Ubben developed at ValueAct are central to Inclusive, such as using activism for change and investing in companies that are misunderstood or misunderstood. understood by investors.
Strategic Education is a profitable education services company that operates primarily through its wholly owned subsidiaries, Strayer University and Capella University. For-profit schools have historically had a bad reputation for charging a lot of money, which causes students to incur a lot of debt freely spent by the government to get a bad or no degree. The Obama administration has cracked down on profitable schools by implementing a number of rules and regulations to hold these institutions to account, which has left much of the industry out of business. With a new Democratic government taking office, these kinds of stocks are taking another hit. Since June 8, the stock is down nearly 49%, compared to a gain of 12% for the S&P 500 over the same period.
This is where the fallacy comes into play. Strategic Education is an accredited post-secondary higher education institution that uses technology and artificial intelligence to enhance the student experience and the value of education, while reducing the cost of education from $ 15,000 per semester to $ 8,000 per semester. In addition, they implement several positive initiatives that benefit both society and business results. The main project they announced in September is WorkforceEdge, a joint venture between the company and Noodle Partners, an online program management company for nonprofits such as the University of Michigan and University of Tennessee.
Inclusive is a private investor in Noodle and was the leader in the company’s Series C financing and was clearly integral to the realization of this joint venture. WorkforceEdge is a program for companies to develop a streamlined, efficient and free online platform to reimburse tuition fees for its employees in online schools. The Noodle relationship allows Strategic to provide business customers with options both on and off the network, just like in healthcare. In-network options (i.e., Strayer and Capella) are often funded in full by the host companies, and out-of-network options (i.e., Michigan, Tennessee, and other schools in the Noodle network) are generally subsidized by the host companies. In addition, Strategic has been able to further reduce tuition for corporate clients to $ 6,000 per semester at Strayer or Capella.
Another, even smaller initiative that Strategic has implemented is Sophia, a low-cost way for students to earn college credit, reducing the time needed to enroll in an online university. These initiatives primarily benefit society on many levels. They significantly reduce student debt, enable students to get a faster, cheaper, and more valuable education, and help companies retain their employees. For Strategic and its shareholders, it provides them with a streamlined and efficient source of student recruitment, something the company never really had. Accordingly, Strategic hopes to triple its B2B students from 20% to 60% over the next five years and cut loans per student from $ 8,100 to a loan-free business primarily paid for by students’ corporate employers.
To ensure management is focused on the right factors for sustainability to drive shareholder value, the company’s senior management team will make their bonuses depend in part on measures related to reducing the number of loans per student. While this could really hurt earnings in the short term, it could be very profitable for the business in the long run. It could turn the company from a company with perceived regulatory risk to no regulatory risk and a no sales force relying on Google to attract students to a company with a corporate sales system through corporate HR departments. If this is achieved, there is a tremendous opportunity for shareholder value creation. Right now, the company is trading at about 6 times its EBITDA, while companies like Workday are trading at more than 12 times its revenue.
Ken Squire is the founder and chairman of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.