Career Education's Big Lesson

• Email
• Share
• Print

Wall Street continues to have a very hard time putting an appropriate price tag on the nation's for-profit education companies. Yesterday, Career Education (Nasdaq: CECO) reported first-quarter earnings per diluted share of $0.40 -- 25% higher than analysts' expectations of $0.32 and twice what the company earned in the same period last year. Not to mention, it only took revenue improvement of 64% to accomplish that earnings double.

For its second quarter, Career Education is also projecting earnings ahead of analyst estimates. Analysts say $0.29; Career Education says $0.33. And to wrap the forecasts up, analysts are looking for $1.61 for fiscal 2004; Career Education thinks $1.75 is more likely.

Lately, it seems the for-profit educators can do no wrong, earnings-wise. (With the exception of ITT Educational Services (NYSE: ESI), that is. Chances are good that having FBI agents running up and down ITT's hallways carrying boxes of documents will dampen the enthusiasm of those prospective student tour groups.)

All the others, from Apollo Group (Nasdaq: APOL) and Corinthian Colleges (Nasdaq: COCO) to Strayer Education (Nasdaq: STRA) and University of Phoenix Online (Nasdaq: UOPX), have been raking in the nation's education dollars this year, and blowing away earnings forecasts left and right.

The reason for the rapidly rising profits is, quite simply, that enrollments are skyrocketing on relatively low fixed costs. Especially in Career Education's case, cheap-to-provide online enrollments are growing faster than offline ones. So sure, Career Education's 57% increase in its total class body is impressive. But the 250% increase in online students dwarfs offline growth. And the contrast in growth figures only grows clearer when you consider that nearly half the increase in total students came from the company's acquiring Whitman Education Group last year.

Just about the only "D" grade on Career Education's first-quarter performance was one we all should have been expecting -- a bad debt expense increase from 3.8% to 4.9% year over year. Everyone knows that Americans are up to their hips in debt these days. It just goes to figure that one of the places they have been spending on credit for things that they cannot afford is one of the greater success stories of the past few years: for-profit education.

Cautious Fools should now be putting the bad debt issue on their radar screens and watching for it as for-profit educators report earnings in coming quarters.

Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article.