After beating estimates twice in a row, Career Education (Nasdaq: CECO) fumbled pretty badly last quarter, with earnings that fell more than 50% below Wall Street's curve. But did the for-profit educator do enough extra credit work during its third quarter to make up the difference? We'll find out when it reports Monday afternoon.
What analysts say:
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Buy, sell, or waffle? Fifteen analysts study Career Education. Four now think it's a buy, but nine more are still voting for a hold, and two say you should sell it.
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Revenues. On average, the analysts expect to see sales fall 12% to $408.2 million.
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Earnings. Yet profits may be up a penny to $0.23 per share.
What management says:
The big news at Career Education this quarter has consisted mainly of management changes. In August, CFO Patrick Pesch announced his departure from the firm to -- you guessed it -- "spend more time with [his] family." He's to be replaced by Michael Graham, poached from his perch as CFO of the privately owned Terlato Wine Group. Also joining the company in August was Thomas Budlong, a 23-year veteran of Wrigley, who will become the senior VP for "organization effectiveness and administration." Last but not least, Career Education gets a new chief marketing and admissions officer in the person of Leonard Mariani, who will be hopping over from a VP position at AT&T.
What management does:
Of the three, you have to envy Graham least of all, for he's getting the toughest job of the bunch: turning around a trend of declining gross and operating margins that stretches back more than a year and leaves Career Education badly trailing rivals such as Apollo Group (Nasdaq: APOL), Strayer (Nasdaq: STRA), and ITT (NYSE: ESI) in the margins race. (Mariani, though, also has his work cut out for him. With revenues down 10% year over year last quarter, attracting more students is going to be a crucial goal.)
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Margins
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3/06
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6/06
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9/06
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12/06
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3/07
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6/07
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Gross
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71.4%
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71.6%
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70.8%
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69.1%
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67.8%
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66.5%
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Operating
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21.3%
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20.8%
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18.0%
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14.4%
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11.9%
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10.0%
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Net
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12.8%
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7.4%
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5.6%
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2.6%
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1.4%
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4.6%
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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:
Analysts are hopeful that Career Education's new team will be able to turn things around and reverse the declines. Consensus estimates call for 34% earnings growth next year, tapering off to average about 11% per year over the next five years.
As an investor, though, I'd like to see much stronger growth than that -- in fact, I'd need to see much stronger growth, or a much lower stock price, before I'd invest. The firm has generated free cash flow approximately equal to GAAP net earnings over the past year, so valuation is a breeze on this one: With a trailing price-to-earnings ratio of 44 and estimated long-term growth at 11%, the stock looks as much as four times overvalued to me -- that is, it carries a PEG ratio of 4.0. Granted, a successful turnaround could change that growth rate in a hurry -- but at this price, it looks to me as though investors are pretending that the turnaround has already happened.
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