by Anjana Sundaram
March 02, 2010
Career Education Corp. has made it clear it is ready to grow in 2010. At a presentation last Monday, Chief Financial Officer Michael J. Graham succinctly said: “This has been a turn-around company, that’s gone. This is a growth company.”
The Hoffman Estates-based higher education provider announced a bold outline of financial goals for 2010, to increase student population and revenue by more than 15 percent. It also aims to grow operating income by $80 million to $100 million, to a total of $350 million to $370 million. By 2014, Career Education hopes, its firm value will be $3 billion compared with its current $2 billion, and its number of cumulative graduates will surpass 1 million.
The bullish outlook comes as Career Education revels in a strong 2009 after three years of weak revenues and the closing of nine branches of its underperforming colleges.The company now has 105,000 active students enrolled in its programs, up an impressive 19 percent from 87,900 in 2008. In the fourth quarter its revenue increased an impressive 19.4 percent to $507.8 million and its net income jumped to $30.7 million. While analysts’ earnings consensus was 32 cents per diluted share according to Zacks Investment Research Inc., Career Education more than doubled that with 72 cents per diluted share.
Dubious analysts became believers. “We were among the doubters at the 2008 Analyst Day where management outlined its 2010 milestones – many of which CECO reached a year early,” stated Jeffrey Silber of BMO Capital Markets Corp. But after the company’s strong 2009 performance and its announcement of 2010 goals, Silber gave the stock an outperform rating and raised his target price to $35. It’s now around $28.
Career Education’s forecast is deemed reasonable by analysts because the company had posted comparable results in 2009. Student enrollment grew by more than 15 percent and operating income swelled by $100 million to more than $250 million. The stock’s ratings are seven buys, eight holds and three sells, according to a Bloomberg LP survey.
The analysts’ earnings consensus for 2010 is $2.35 per diluted share, according to Zacks Investment Research Inc., compared with earnings of 94 cents per diluted share in 2009. Analysts expect revenue to be $2.06 billion in 2010, compared with the $1.84 billion in 2009, according to Thomson Reuters.
By and large, most analysts have revised their estimates upwards, crediting the company’s success in building traction this past year as well as its distinctive niche in the education sector. The company has differentiated itself by offering a broad range of degrees, from Ph.D.s to certificates. In addition, coursework is geared towards working adults rather than high school and college students. “Traditional schools don’t typically target working adults or trade-based programs, two areas Career Education focuses on,” stated Todd Young, an analyst at Morningstar Inc. who has raised his “fair value” estimate of the stock to $38 per share.
The stock market has reacted favorably to Career Education’s recent announcements, with the stock price steadily climbing from $23.31 to $28.41 year-to-date. The stock is close to its 52-week high of $29.44, far above its 52-week low of $17.94. Career Education stock sells at a lofty price-earnings ratio of 30.2, far above the 20.6 of Standard & Poor’s 500 Stocks.
Career Education has a three-pronged business model consisting of University, Career Focused and International segments. Reaching the company’s 2010 goals means focusing on the university and career segments. The University business is the largest of the three, focusing on technical and design training, whereas the Career Focused segment offers a heath business track which company officials say its the fastest growing institution.
For the Health Education track, the company opened seven new campuses in 2009 and hopes to venture into new markets by opening an additional six to eight new campuses in 2010. “The value of the healthcare business is about $600 million based on recent acquisition multiples, [and] the total operations combined could be valued at $2.7 billion — well above the current market cap of $1.9 billion,” stated Robert Craig, analyst at Stifel & Nicolaus. CFO Michael Graham said in an earnings teleconference last week that the company will spend $30 million in opening the new campuses.
Career Education has also outlined how it will manage its operational costs from 2010 to 2014. It plans to consolidate its Chicago-area real estate holdings and invest in educational services and facilities. Its bad debt ratio, which was 3 percent for 2009, will modestly increase due to growth in the culinary segment. “As of the end of December, we only have $44 million on our balance sheet of student loan balances, despite a 30 to 40 percent growth in population and starts on the Culinary business,” said Graham in the teleconference.
Some analysts worry about the company’s bad debt expense, especially since it will likely increase next year because the company is planning on providing internal lending to students. Bad debt has become a hot topic among for-profit educational companies, partly because credit markets have dried up in the recession and partly because of the Department of Education’s proposed “gainful employment” regulations on vocational programs. The provision states that graduates whose annual debt repayment loads exceed 8 percent of the average incomes in the field will lose eligibility to gain federal financial aid. The department reasons that for-profit institutions should be held to the debt-to-income limit to ensure they prepare students for jobs where they make enough income to repay their student loan debt in ten years. Many institutions, like Career Education, are considering taking on the debt themselves to avoid regulatory inefficiencies, which makes them financially more risky.
“While 2010 goals appear achievable, the longer-term target requires more optimistic assumptions than we can make with conviction…We remain concerned about the company’s vulnerability to gainful employment regulations given the high-priced tuition of some programs,” stated Susanne Stein, analyst at Morgan Stanley & Co. Inc, who remains “underweight” on Career Education stock.
Other analysts believe the regulations being drafted are still being revised and it’s too early to say what the impact of the decision will be on Career Education. The threat of increased debt does not bother some analysts who believe the company is in good financial health. “The company had less than $5 million in debt compared with $284 million in cash and cash equivalents and another $200 million in other investments,” stated Young.
Career Education hopes its bold new growth approach will position itself as an agile and scalable institution for the future. “The employee-focused approach has enabled us to reduce turnover by 68% since 2007 and it’s our collective student incentive approach coupled with the adaptability we have shown as an organization that are behind the strong financial performance we’re reporting,” CEO Gary McCullough said of the company’s strategy.
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