Foolish Forecast: Blooms on Learning Tree

For-profit information technology teacher Learning Tree (Nasdaq: LTRE  ) is the latest company in the education sphere to issue earnings this season. The company reports its fiscal Q2 2006 numbers tomorrow.

What analysts say:

• Buy, sell, or waffle? Only one analyst follows Learning Tree, giving it a hold rating.
• Revenues and earnings. There are no published estimates for Learning Tree's fiscal Q2 2006 revenues, but the analyst posits a $0.10 per-share loss for the quarter, $0.01 better than last year.

What management says:
Learning Tree management takes a minimalist approach to earnings releases, providing just a balance sheet, an income statement, and a few paragraphs of explanatory prose. In its most recent release, from February, CEO Nicholas R. Schacht said he was "pleased" that attendance at the company's courses continues to rise. Although revenues for the quarter were flat against Q1 2005, operating profit rose 15%, net profit went up 144%, and profit per diluted share was up 160%. Before that, in the earnings release for full-year 2005, Learning Tree revealed that Sarbanes-Oxley compliance ate up $1.7 million in pre-tax costs. The company expects this cost to decrease "substantially" going forward.

What management does:
Learning Tree's gross margins have been contracting as sales stagnate while the cost of sales (slowly) rises. On the plus side, the company has driven down its selling, general, and administrative expenses. As a result, operating losses are shrinking, and the company actually became net profitable on a rolling basis last quarter.

Margins %	10/04	12/04	4/05	7/05	9/05	12/05
Gross	51.5	51.2	50.9	50.1	49.7	49.7
Op.	(1.1)	(1.5)	(0.9)	(0.4)	(0.7)	(0.3)
Net	(0.4)	(1.3)	(1.2)	(0.6)	(0.5)	0.4

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
I wouldn't go so far as to call Learning Tree a great business, but the company does appear to be improving. And if it can continue keeping its costs under control generally, and benefits as promised from a decrease in the expense of Sarbanes-Oxley compliance, there's even the chance Learning Tree could start earning consistent, albeit small, profits. Were you to remove Sarbanes-Oxley costs from the equation entirely last year, the company would have come very close indeed to breaking even.

Will Learning Tree earn a consistent profit? I don't know. But I don't see a lot of risk to holding the stock in hopes that it can. Learning Tree boasts a solid balance sheet, where cash and securities combined amount to $86 million -- nearly half the firm's market cap. And while Learning Tree earned no cash profits over the last four quarters, neither did it experience net cash outflows. Free cash flow for the last year has been almost exactly breakeven. With this stock, I think the people taking the real risks are the "investors" who have sold 13% worth of the float short.

Competitors:

• SkillSoft (Nasdaq: SKIL  )
• New Horizons Worldwide

Fool contributor Rich Smith does not own shares of any company named above.