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Sar Medoff

CECO AT A GLANCE

P/E ► 19.4 AVG EV/EBITDA ► 10.6 AVG ROA ► 6.6% LOW ROE ► 10.2% LOW Debt to Equity ► 0.674 AVG Current Ratio ► 1.36 AVG Interest Coverage Ratio ► 48.6 AVG

 

 

 

 

 

 

Career Education Corporation (NASDAQ:CECO) is a global for-profit university that offers associate, master's, bachelor's and doctoral degree programs in vocational areas such as business, communications and IT. The company had an enrollment of 89,500 students at the beginning of 2008 and generates most of its revenue from tuition.

Maintaining accreditation is critical to CECO's financial health. 2/3 of the company's tuition fees come from Title IV funds(government financial aid) that are only available to accredited schools. In 2005, American InterContinental University, a subsidiary, was placed on probation by its accrediting association for numerous violations, including the misrepresentation of its offerings to enrollees. During the same year, the Department of Education restricted Career Education from acquiring new domestic schools or opening up new branches of existing campus; these restrictions were lifted by the end of 2007, but resulted in falling enrollment in 2006 and 2007.^[1].

Historically, enrollment at for profit educational institutions has increased during economic downturns as poorer job prospects cause prospective students to view continuing eduction more favorably. During the 2001 recession, enrollment growth at four-year for-profit education institutions doubled, and during the first years of recessions over the last four decades, enrollment growth in two-year education programs has increased by an average of 12% ^[2].

Business Financials

CECO offers educational services to more than 89,500 enrolled students at 75 campuses in the United States, Canada, France, Italy, and United Kingdom. Programs are offered in five career-oriented disciplines: Culinary Arts, Visual Communication and Design Technologies, Health Education, Business Studies, and Information Technology.

In FY 2007, Career Education had revenues of $1.675 billion, a 7.3% decrease from $1.806 billion in FY 2006^[3]. Factors that contributed to CECO's troubles include American InterContinental University's probation and the accompanying negative publicity, overall decrease in student enrollment, and a larger portion of enrollments were for online programs that generate less income than on-campus enrollment.

In 2006, net income fell more than 80%, which the company attributed to: reductions in the prices of certain online associate's degree programs, disproportionate growth of online Colorado Technical University which generates a smaller profit than American InterContinental's online program, and increased occupancy expenses which required a larger-than-normal slice of 2006's reduced total revenue^[4].

One bright financial spot for CECO is a two-year decrease in bad debt expense. Bad debt expense decreased 25% for both 2007 vs. 2006 and 2006 vs. 2005. Career Education attributes this decrease to less exposure (as a result of both decreased enrollment and tighter lending standards), improvement in student retention rates, and improved collection of debts owed^[5].

Career Education's subsidiaries are organized in six groups:

• Academy - The International Academy of Design and Technology offers programs in visual communications and design technologies
• Colleges - Programs offered in business studies, health education, information technology, and visual communications and design technologies
• Culinary Arts - Le Cordon Bleu and Kitchen Academy offer culinary arts programs and hotel and restaurant management instruction.
• Health Education - Sanford-Brown schools offers programs in business studies, health education, visual communications and design technologies, and information technology.
• International - Campuses located in France, Italy, and United Kingdom offer classes in business studies, fashion and design, and visual communications and technologies
• University - American InterContinental University and Colorado Technical University offer programs in business studies, visual communications and design technologies, health education, information technology, criminal justice, and education.

The University segment is the largest group and enrolls approximately 40,400 students^[6]. The University segment accounted for 41% of total revenue, nearly double that of any other segment^[7]. The Business Studies program is the largest across all groups and enrolls more than 44% of the student population^[8].

^[9]

^[10]

^[11][12][13]

Key Trends and Forces

Accreditation Woes and Department of Education Restrictions

In 2005, American InterContinental University was placed on probation by its accrediting association, and although it was removed from probation in December 2007, the company's public image suffered major damage. Also in 2005, the US Department of Education restricted CECO from acquiring any new domestic schools or opening new branches of existing domestic schools^[14]. The combination of probation and expansion restrictions marred the company's reputation and enrollment in 2006 decreased 7.3% from the previous year^[15] followed by a 10% decrease in 2007. ^[16], By January 31, 2008, however, enrollment had begun to climb again, posting a 5.7% from 2007.^[17].

Capitalizing on Increased Demand

The U.S. Department of Education estimates that the post-secondary education market is worth at least $370 billion. The Department of Education estimates that nearly 40% of all students enrolled in post-secondary education programs are older than 24; 80% of Career Education's enrolled students are 'non-traditional' and older than 21^[18]. Over the next six years, the percentage of 18-24 year old students will increase by 16%, and the number of non-traditional students should grow at a similar rate^[19].

Government Regulation and Financial Aid Policies Determine CECO's Fiscal Success

The post-secondary education market is highly regulated for any educational institutions that receive funding from the government; in Career Education's case, government funding takes the form of financial aid programs that subsidize qualified students' education costs. In order for an institution to receive Tital IV funds, they must be accredited and recognized by the U.S. Department of Education. In 2005, American InterContinental University was placed on probation by the Commission on Colleges of the Southern Association of Colleges and Schools (SACS) for failing to implement 15 recommendations made during its re-accreditation in 2002-2004^[20]. American InterContinental University successfully implemented SACS's recommendations and was removed from probation in December 2007. Also in 2005, the Department of Education restricted Career Education from acquiring new domestic schools or opening up new branches of existing campus pending a review of CECO's previous financial statements; these restrictions were lifted in January 2007. Title IV government funds account for 63.1% of all tuition at Career Education ^[21]. In January 2008, Sallie Mae declared that it will be terminating its loan program within the entire postsecondary education market; this combined with the 2007-2008 credit crunch will make it more difficult for students to find loans to pay tuition.^[22]. In 2007, Sallie Mae loans comprised 2.7% of total tuition revenue with other private loans accounting for another 15% of tuition revenue^[23].

Competition

The post-secondary education market is extremely competitive and not dominated by any single player. The United States has approximately 6,440 post-secondary education institutions^[24]:

• 2,570 private, for-profit schools
• 2,010 public, non-profit schools
• 1,860 private, non-profit schools

In addition to this extreme market fragmentation, the extensive accreditation process acts as a significant barrier to entry for new companies.

Of the other private, for-profit schools that target non-traditional students, Apollo Group (APOL) , DeVry University (DV), and ITT Educational Services (ESI) pose the greatest competition to Career Education.

Apollo Group (APOL) operates the University of Phoenix, the largest private, for-profit postsecondary education institute. They serve more than 313,700 enrolled students, at 102 campuses and 157 learning centers in forty states. Apollo's total revenue for FY 2007 was $2.72.8 billion.

DeVry (DV) served approximately 108,800 students in 2007 through its four subsidiary institutions - DeVry University, Ross University, Chamberlain College of Nursing, and Becker Professional Review. DeVry University is an undergraduate institution with more than 80 locations and the Keller Graduate School of Management; enrollment in 2007 was approximately 57,000. Ross University operates the Ross University School of Medicine and the Ross University School of Veterinary Medicine in Dominica. Enrollment in 2007 was 3,700. The Chamberlain College of Nursing enrolled nearly 1,100 students in 2007. Becker Professional Review operates CPA and CFA review courses that enrolled more than 47,000 students in 2007. DeVry's total revenue for FY 2007 was $933.5 million.

ITT Educational Services (ESI) operates 93 institutes in 34 states serving approximately 49,000 students. In FY 2007, ITT's total revenue was $869.5 million.

Market Share

The National Center for Education Statistics predicted that there would be approximately 2.1 million students enrolled in private, for-profit postsecondary education institutions in the 2006-2007 school year. Using this predicted number of students and enrollment information for the Career Education and its competitors, each institution's market share is listed below.

Notes

1. ↑ CECO 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 46
2. ↑ School Stocks That Win When Jobs Go Bad
3. ↑ CECO 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 48
4. ↑ CECO 2006 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 52
5. ↑ CECO 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, pages 51-52
6. ↑ CECO 2007 10-K, Item 1: Business, page 7
7. ↑ CECO 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 49
8. ↑ CECO 2007 10-K, Item 1: Business, page 8
9. ↑ CECO 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 48
10. ↑ CECO 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 49
11. ↑ CECO 2004 10-K, Item 1: Business, page 6
12. ↑ CECO 2006 10-K, Item 1: Business, page 8
13. ↑ CECO 2007 10-K, Item 1: Business, page 12
14. ↑ CECO 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 46
15. ↑ CECO 2004 10-K, Item 1: Business, page 6
16. ↑ CECO 2006 10-K, Item 1: Business, page 8
17. ↑ CECO 2007 10-K, Item 1: Business, page 12
18. ↑ CECO 2007 10-K, Item 1: Business, page 7
19. ↑ APOL 2007 10-K Item 1: Business, page 6
20. ↑ CECO 2005 10-K, Item 14: Commitments and Contingencies, page F-48
21. ↑ CECO 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 64
22. ↑ Career Education Shares Drop
23. ↑ CECO 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 64
24. ↑ DV 2007 10-K, Item 1: Description of Business, page 12
25. ↑ Career Education Corporation
26. ↑ APOL 2007 10-K Item 1: Business, page 4
27. ↑ DV 2007 10-K, Item 1: Description of Business, pages 7-11
28. ↑ ITT Educational Services Overview
29. ↑ Career Education Corporation
30. ↑ APOL 2007 10-K Item 1: Business, page 4
31. ↑ DV 2007 10-K, Item 1: Description of Business, pages 7-11
32. ↑ ITT Educational Services Overview