Wednesday, November 02, 2011

Career Education Corp. (NASDAQ:CECO): Ugh..

Career Education Corp. (NASDAQ:CECO) literally shit the bed last night as the co issued a slew of announcements this evening, including 1) the resignation of CEO Gary McCullough, 2) an update on its internal investigation into placement rates, and 3) its third-quarter results (a week earlier than expected). Board chairman Steven Lesnick has been named CEO while the board conducts a search for a permanent replacement.

CECO revealed that 36 of its 49 ACICS-accredited Health Ed and Art & Design schools failed to meet minimum accreditation standards for its placement rates in 2010-2011.

I've seen 3 downgrades so far but I'm quite sure more will follow after the 8:30 AM ET conference call concludes:

- William Blair is lowering CECO to Underperform saying that given 1) the likelihood that estimates will come down a lot for 2012 and 2013, 2) the chance of a material fine/settlement could occur, and 3) visibility on a recovery in starts for every franchise but the international business, it is difficult to value (in other words where would the stock be a buy) the enterprise with traditional metrics. On a rough sum-of-the-parts basis, (no value for Health or A&D, $50 million to $150 million in legal liabilities or fines, and $300 million in teachout cash flow losses over 2 years at Health and A&D) they believe the stock is worth probably $10 and $12, but a lot of that value depends on what 2012 profits in the University segment are; hopefully they will get a better feel for that on Wednesday’s call.

- First Analysis cuts CECO to Underweight noting they believe the independent counsel has not yet completed its investigation into the company's other segments, suggesting additional issues may still be uncovered. AIU and CTU are regionally accredited and thus don't have to report placement-rate data to their accrediting body (the Higher Learning Commission), though they believe they have provided placement data to prospective students, potentially exposing them to other legal and regulatory risks if the data proves to have been inaccurate.

Firm expects Career Education's stock will trade down meaningfully today. However, given the difficult-to-quantify and potentially substantial nature of the issues noted above, they find it difficult to recommend even investors with a deep value focus take a meaningful position in the stock at present.

They believe other names in the sector may trade down as well as investors ask whether others could have similar issues. Firm reminds investors that many of the companies in their coverage universe are regionally accredited and don't purport to offer placement services, much less report placement rates to their accrediting bodies. (These include Apollo, American Public Education, Capella, Strayer, and institutions at non-covered companies Bridgepoint and Grand Canyon. DeVry University is also regionally accredited, and while it does provide graduate employment data to students, First Analysis is confident in DeVry's internal controls.) They also believe nationally accredited schools that have grown organically, such as ITT and UTI, have operational controls in place to prevent such issues. Finally, they note that while Career Education's announcement may provide another arrow for Senator Harkin's quiver in his campaign to further clamp down on the sector, the placement-rate question isn't a new one, and a hearing he held in September 2010 was on precisely this topic.

- Stifel cuts to Hold from Buy noting that while an earnings and enrollment miss in this very challenging environment is not shocking, their original Buy thesis was predicated on the sum of the parts being greater than the enterprise value, improving academic quality, and progress being made by a relative newer management team. While progress was made on several fronts, the board’s decision to accept the CEO’s resignation in light of recent allegations of inflated placement rates in the health care division suggest lacking integrity in disclosed metrics. As such the firm believes the stock will be in the state of limbo for the foreseeable future. They therefore feel compelled to move to the sidelines until the management situation is clarified/resolved.

- CSFB says they expect shares to face significant pressure this morning.

- Baird says they expect CECO to trade down today.

- Morgan Stanley notes they expect shares of CECO to decline sharply as investors come to terms with the CEO’s sudden departure, findings by outside counsel of improper placement practices, and pre-reported weak Q3 results. CECO has a history of accreditation issues and in the current environment, in which accrediting bodies have been under pressure to better police the industry, they do not expect this to be handled with leniency. Firm notes though that this issue appears to be CECO specific and while the whole group is likely to trade off, they would view this as a buying opportunity for companies with better records of regulatory compliance.

Notablecalls: Reading the PR, all I could think was 'is this going to single digits now?'

Utter clusterf*ck and this could get worse as the independent counsel completes its investigation. Note the 49 colleges investigated represent around 40% of CECO revenues. So there could be more to come.

CECO has 6 bucks of cash per share on the balance sheet, which should limit the downside to $9-10 level.

This could hurt the entire sector. It's unlikely CECO is alone in this with its placement issues.

1 comment:

db said...

Well done