Editor's note: Based on clarifications provided by Career Education regarding the "teach out" process, this article has been revised to better reflect the implications of the company's plans for its Brooks College and IADT campuses. We regret the error.
Career Education (Nasdaq: CECO) joined in the market rout Wednesday, its shares diving 6% on an earnings release that reported declining revenue but a reversal of last year's asset-writedown-driven loss, for a $0.12-per-share profit. That, however, was only the beginning of the story.
Buyers wanted ... and buyers wanting
Perhaps the most important bit of information in the release was its mention of the decision taken in June to "teach out" three of CEC's campuses. As you may recall, CEC announced its intention to sell off 13 campuses last year. Unfortunately, while CEC is still seeking buyers for most of these campuses, potential purchasers seem to be playing hooky on the Brooks College campuses in Long Beach and Sunnyvale, California. Unable to sell the schools, but also unwilling to leave its current students in the lurch, CEC has decided to "teach out" these campuses (as well as the Pittsburgh campus of the International Academy of Design & Technology (IADT)). Students now enrolled will continue attending classes through graduation -- and as soon as the last student is out the door (no later than March 2009 for the two Brooks campuses, and December 2008 for IADT), said door will be chained behind him and the school closed.
That's a shame, but not a crying shame. While I'm sure management (and shareholders) would prefer to be quit of the underperforming schools sooner rather than later, the fact remains that as of March 2009, all three will be history, and no longer a drag on profitability. And once free of the dead weight, we could easily see CEC's operating margins double in the long term.
They don't need no (four-year) education
The other bit of information in CEC's release that really caught my eye was this: Consolidated revenues declined 10% year over year, with much of the decline owing to "an increase in students in our University segment's fully-online associate degree programs, which offer lower tuition rates than those of our University segment's fully-online bachelor's degree and master's degree programs." I find this development perhaps even more troubling than the reversal of the Brooks campuses' divestment.
You see, as a rule, for-profit educators such as Apollo (Nasdaq: APOL), Strayer (Nasdaq: STRA), ITT (NYSE: ESI), and Corinthian Colleges (Nasdaq: COCO) earn their best profit margins from their online divisions. (Latin American educator Laureate Education (Nasdaq: LAUR) is the sole exception to this rule.) Therefore, any fall-off in online tuition revenue is bound to hit CEC especially hard on the bottom line. And indeed: "The University segment's fully-online platforms' income from operations declined to $30.9 million during the second quarter of 2007, from $67.6 million during the second quarter of 2006."
Need some remedial education on CEC? You'll find it in:
* Career Education Aces Annual Exam
* Foolish Forecast: Career Education's Q3 Report Card
* Foolish Forecast: Career Education's Q2 Report Card
Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.
http://www.fool.com/investing/small-cap/2007/08/09/career-education-changes-the-syllabus.aspx
