If you think the fiscal cliff discussions are a mess, just take a gander at the for-profit education sector if you're longing for a laugh -- or a scare, for that matter.
The Obama administration has taken aim at the for-profit education sector for a multitude of reasons, including high debt burdens for graduating students, low employments levels for those who graduate, and the tactics by which these schools recruit new students by using federal funds. The Consumer Financial Protection Bureau, created only recently by the Obama administration, has already opened investigations into student-aid lending practices at both ITT Educational Services (ESINQ) and Corinthian Colleges (NASDAQ: COCO), and has left much of the sector on edge.
With President Obama winning election for a second term, it wouldn't be far-fetched to assume that his administration will push even harder to revamp, or broaden the scope of, the previously pushed aside gainful-employment legislation.
In response to this new scrutiny, earnings quality and student enrollment have quickly gone downhill. Apollo Group (APOL), the owner of the University of Phoenix, posted a massive 60% decline in profits in its most recent quarter, and noted that it'd be laying off 800 workers and closing 115 of its campuses in order to save $300 million annually by 2014. Similarly, DeVry (ATGE 0.89%) announced it was laying off 570 people, or 5.4% of its staff, over the summer in order to reduce expenses.
By now you must be thinking, "What on Earth would tempt someone to gamble in a sector where cost-cutting is the only mode of growth at the moment?" The answer to this question lies within another question. What if I told you that you could buy $1 for just $0.585... would you be intrigued?
Of course you would! That's why I'm suggesting that if you're going to take a gamble on the for-profit education sector, then Career Education (PRDO 1.09%) should be at the top of your list. With $373 million in net cash ($5.56 per share), you're paying just $0.585 per $1 to own a piece of the company.
The catch here is that Career Education also recently announced the closure of 23 schools and layoffs totaling 900 employees. Chances are, between the company's restructuring and school closures, that it's going to burn through cash rather than net free cash over the next 12 months. According to management, however, these restructurings are expected to return Career Education to a healthy profit by 2014. If you assume, like I have, that the restructuring and school closures will cost the company less than $155 million (my best "guesstimate" is that its cash outflow will be close to the $80 million mark), then you've managed to get into this for-profit educator for less than net cash value.
Understandably, my bullishness is predicated on the assumption that President Obama focuses on reinvigorating the economy and leaves for-profit educators largely to recover over the next few years. If the Obama administration takes aim once again at for-profit educators, my gamble could turn out to be a foolish play (note the small "f"). In the meantime, I am going to make a CAPScall of outperform on Career Education with the expectation that value investors pile into this company sometime in 2013.
