It's amusing to ponder how Harvard's fictional Professor Kingsfield (he's the guy from The Paper Chase who told his first-year law students that their minds were "mush" and who delighted in humiliating them as often as possible) would react if he suddenly found himself teaching for a for-profit college such as Career Education (NASDAQ:CECO).
One can only imagine his reaction upon learning that he was supposed to offer his students "fast-paced programs that provide a good return on their tuition investment," in the words of Steve Bostic, CECO's largest individual stockholder.
Ah, but that was the Harvard of the 1970s -- bad haircuts, blackboards, chalk, and all -- and this is the state of higher education today -- dissident stockholders, volatile stock prices, online instruction, and grade inflation.
Internal infighting
Bostic, the former self-appointed president of American Intercontinental University (AIU), which he sold to CECO in 2001, appears determined to be the standard bearer for the "educational mavericks" who aim to provide 21st-century students with "applied knowledge that is going to make them immediately valuable to a company," as a colleague of Bostic describes it. When he bought AIU in 1996, Bostic built his growth strategy on the concept of "power campuses," offering students technology-oriented business degrees taught in a corporate-like setting.
Perhaps this is why Bostic became so disgruntled when his dream looked like it was about to be deferred by CECO management, led by CEO and Chairman Jack Larson. On May 5, 2005, he sent letters to both the board of directors and CECO stockholders, claiming that the "root cause" of CECO's problems was a "lack of strong leadership and a collapse of both corporate governance and Board oversight." He also called for shareholders to join him in his quest to "improve direct accountability of the Board and management to us -- the owners of the company."
In my view, "shareholder activism" may well be a good thing for a growing company, as TMF contributor Bill Barker pointed out a while back. Despite the ongoing debate over the direction of this company, Career Education Corporation might be the most attractive investment in a growing industry, which includes Apollo Group (NASDAQ:APOL) and ITT (NYSE:ESI). With some of its recent difficulties behind it and its online division growing rapidly, this stock could be poised to recover some of the ground it has lost over the past 13 months or so.
External inquisitions
Things might be looking up, but investors would be wise to consider this company's recent past. Below are just a few of the more unwelcome developments:
- The U.S. Department of Education has refused to approve CECO's applications for new locations until it completes its review of the company's "restated" financial reports.
- The Chicago office of the Equal Employment Opportunity Commission is investigating charges that women were subjected to sexual harassment at AIU Online.
- The SEC's "enforcement division" is still looking at CECO's 10-K filings for 2003 and 2004.
- In a 60 Minutes expose that aired on Jan. 30, 2005, former admissions representatives admitted that they "were really salespeople," expected to enroll three high school graduates a week, "regardless of their ability to complete the coursework."
- Finally, the Department of Justice has been analyzing a slew of lawsuits by former students, investors, and employees -- including Vinod Kapoor, a former faculty member at AIU in Los Angeles. Kapoor filed a wrongful termination suit against CECO after he was fired in March 2004 for complaining that he was pressured to keep failing students on his class list so that the school could continue to receive federal funds, and that many students in his classes did not have high school degrees, had no intention of attending classes, and were sometimes simply fictitious names on the roster.
The pressures facing Career Education are not unique to this Illinois-based company. ITT and Apollo, for example, have all dealt with similar examinations into their recruitment and enrollment procedures.
Despite the litany of problems, CECO is nonetheless outperforming the industry as a whole and, presumably, will continue to make headway against its current litigation headaches. At the end of June, the company announced that a federal court dismissed a civil lawsuit alleging that the company submitted a false claim for payment to the federal government. It also reported that a state court had refused to certify a class action suit against the AIU online campus, brought by three former admissions officers who claimed they were denied overtime pay.
Going online
Although CECO's overall enrollments have slowed to a somewhat disappointing 12% as announced in the most recent earnings statement, the student population from the Online Education Group was up 70% to 30,000 during the same period. While revenue from the online business is lower than from the traditional business, this is still an encouraging trend.
The company also reported that revenues were up 23% in the second quarter year on year, and net income was up 44% to $0.50 per share. While some observers were concerned that management's guidance for the year was lower than expectations, I think the rapid growth in the online division might move CECO to the head of the class over the long term.
For more Foolish schoolishness:
Ellen Dowling, the Standup Trainer, does not own any shares of the schools mentioned in this article, but she has been an instructor for the University of Phoenix. Ellen is currently teaching online for ITT and welcomes your feedback.
