Shares of for-profit educator Career Education (NASDAQ:CECO) withstood the selling frenzy pretty well yesterday, shedding just a small fraction of a percent of their value. Today, as the market throws yet another hissy fit, they're actually bucking the trend and heading north.

Quite a contrast from Tuesday's post-earnings sell-off, eh? So what's with all the buying? What good news has replaced the bad news that sliced 7% from the company's market cap on Tuesday?

Good question
So far as I can tell, the sole bit of good news at Career Education (CEC) since earnings broke was an upgrade this morning from an analyst at BMO Capital. Such moves are ordinarily ho-hum, that's-nice bits of news for me, but I can't help noticing that BMO ranks among Wall Street's Best stock pickers on Motley Fool CAPS. So bear with me as I reexamine CEC's quarterly autopsy for signs of life:

  • Sales for the fiscal third quarter 2007 declined 6% to $404.4 million, a bit worse than predicted.
  • Profitability collapsed, with net income falling 25%, equating to $0.21 per share -- also worse than predicted.

Hmm. The prognosis for this patient isn't looking so hot. But wait a moment. Here's something interesting. Free cash flow has only fallen 4% year to date, in comparison with the cash profits generated in the first three quarters of fiscal 2006. Total take so far this year: $149.1 million. That's nearly three times what CEC is reporting in net profit under GAAP. Now, that's nothing at all like what I was expecting to see, and it forces me to dramatically revise the valuation I had described in the pre-earnings Foolish Forecast.

New model
Let's see. If CEC keeps on generating cash profits at the rate it's achieved so far this year, we're looking at a run rate of about $199 million for the year. Weighed against the firm's $3 billion market cap, that gives us a price-to-free cash flow ratio of just 15. That's quite a discount to the 28 P/FCF that Apollo Group (NASDAQ:APOL) shares fetch, the 37 P/FCF that ITT Educational (NYSE:ESI) commands, the 56 times multiple at Strayer (NASDAQ:STRA), and of course, the negative free cash flow at Corinthian Colleges (NASDAQ:COCO), Lincoln Tech (NASDAQ:LINC), and Universal Technical (NYSE:UTI).

Although CEC will need to grow faster than analysts' consensus expectation of 11% per year to make its shares an out-and-out bargain, their price does seem to compare favorably, at least at first blush, to those of CEC's peers. Yes, folks, I think I see where BMO is coming from on this one. What's more, I'm inclined to agree.

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

Fool contributor Rich Smith does not own shares of any company named above. Universal Technical is a former Hidden Gems recommendation. The Motley Fool has a disclosure policy.