Foolish Forecast: Career Education's Q2 Report Card

School's out for the summer, but a for-profit educator's work is never done. Career Education (Nasdaq: CECO  ) reports its Q2 2006 earnings tomorrow afternoon.

What analysts say:

  • Buy, sell, or waffle? Sixteen analysts study ambivalence at Career Education (CEC). One says buy, three say sell, but a full dozen sit on the fence with hold ratings.
  • Revenues. Analysts expect sales to be nearly flat against last year, at $504.7 million.
  • Earnings. Likewise with profits, where they foresee a 2% decline to $0.49 per share.

What management says:
With this company, it's not so much "what management says" that matters, but what the U.S. government says. With that in mind, let's look at the recent SEC filings made by CEC on the latter subject.

In late May, CEC received a letter from the Department of Justice (DOJ) informing the company that it is under investigation (what else is new?), this time for possible submission of "false claims or statements to the U.S. Department of Education." Reading between the lines of the announcement, it seems the DOJ is looking into allegations that CEC misrepresented to students: (i) tuition costs; (ii) the likelihood that after paying all that tuition, they'd find a job upon graduation; and (iii) that how the firm compensates its employees may have given them an incentive to make such alleged misrepresentations.

Also in May, the Department of Education (DOE) informed CEC that it is continuing to monitor the company's activities, and while doing so, it would not "approve applications for any additional branch campuses" -- throwing a monkeywrench into the company's expansion plans. The DOE is making limited exceptions for planned campuses in San Antonio and Sacramento, however, so there was at least some good news in this letter.

What management does:
With all this investigating going on, you might think legal fees alone would be stealing all of Career Education's lunch money -- but that's not the case. On the contrary, as the rest of the for-profit education industry emerges from the shadows of federal investigation, leaving CEC alone to bear the brunt of Uncle Sam's ire, the company is still running strong. Each of the rolling gross, operating, and net margins today remain higher than they were 18 months ago.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

67.8

68.2

68.9

69.4

69.1

69.1

Op.

17.1

18.0

18.3

18.4

18.4

17.9

Net

10.4

10.7

11.0

11.3

11.5

11.2

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:
The investigations aren't entirely without their costs, however. We can see that sales grew just 6% year over year in the last six months, suggesting that on the one hand, the DOE's review may be having a chilling effect on CEC employees trying to recruit students; on the other hand, the inability to add campuses as fast as CEC would like is restricting the company's capacity to add new students.

Meanwhile, the cost of services is rising faster than sales (at 8%). The good news is that selling, general, and administrative expenses (where you generally find the lawyers' bills cropping up) grew more slowly than overall sales, at 5%. It seems to this Fool that CEC is hurt less by the cost of cooperating with the government investigations than by the chilling effect they've imposed on CEC's ability to do business freely.

Competitors

  • Apollo Group (Nasdaq: APOL  )
  • Strayer (Nasdaq: STRA  )
  • Corinthian Colleges (Nasdaq: COCO  )
  • DeVry (NYSE: DV  )
  • ITT Educational (NYSE: ESI  )
  • Laureate (Nasdaq: LAUR  )

Need some remedial education on CEC? You'll find it in:

Which educational powerhouse made Tom Gardner's list of superior small-cap stocks? Find out with a free 30-day trial toMotley Fool Hidden Gems.

Fool contributorRich Smithdoes not own shares of any company named above.


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