It has been a tough few years for the for-profit education sector as the federal government and Congress has put the industry and its business practices in their cross-hairs. More specifically, the Department of Education has been tightening its regulations allowing education providers to get paid through the government's student financial aid programs, the main source of revenue for virtually all institutions. The new environment has caused Career Education (NASDAQ:CECO) to operate in the red lately, but a recent sale of its international schools has the company valued at less than its expected post-transaction cash balances. Should investors take the plunge?
What's the value?
As its name implies, Career Education generally targets the non-traditional, working adult population. Only 13% of its students are under the age of 21, according to its latest annual report. The company's schools are focused on high-growth occupations including business, health care, and culinary arts which could reasonably be expected to remain in demand for the foreseeable future. However, Career Education's high percentage of certificate and associate degree students, roughly 40% of total enrollment, has led to criticism and outstanding lawsuits over the value of the education. Some students have failed to attain so-called "gainful employment" after the completion of their programs.
In the 2013 fiscal year, Career Education has reported dismal financial results. Among these results is a 22.6% top-line decrease that was caused by declines in both new and total enrollments. Below-average program completion rates at certain Career Education campuses have led regulators to place the campuses under review, which is increasingly leading the company to close them down due to an inability to meet minimum standards. Rising student services costs have also severely affected Career Education's operating profitability, leading to losses for four of the company's five operating units in the current period.
Unfortunately, size doesn't seem to be the answer to Career Education's problems. Its larger peer Education Management (NASDAQOTH:EDMC), with more than twice as many students, is encountering many of the same operational issues. The company operates schools, including the Art Institutes and Argosy University, that target a similar student population and provides programs that lead to careers in similar fields. While Education Management's campuses haven't experienced below-standard program completion rates to date, the company is expecting certain campuses to fail regulators' rising minimum standard levels over the next year.
In the 2013 fiscal year, Education Management outperformed its smaller competitor but still suffered a double-digit decline in total student enrollment. Like Career Education, Education Management has endured a negative trajectory for its profitability over the past few years. This is due primarily to higher student services costs, though it has chosen to maintain the size of its operating network as it treks toward a goal of 1 million cumulative graduates by 2020. The company is also working hard to improve its student retention rates through tuition freezes and greater scholarship availability, something that will hopefully improve downstream program completion rates (which is a key statistic on the minds of regulators.)
Caution is the word of the day
While Career Education is undoubtedly cheap and selling for less than its expected cash balances, the federal government's crusade against the for-profit education sector requires caution on the part of investors. The business of education is hard to ignore, however, given that post-secondary education generates roughly $560 billion in annual revenues and is expected to grow as student enrollments continue to increase. As such, investors need to have a stake in the sector. A good bet is likely to be for-profit education pioneer Apollo Group (NASDAQ:APOL).
With roughly 300,000 students, Apollo Group is the for-profit education industry kingpin, primarily providing programs through its University of Phoenix unit. Like its smaller competitors, the company has been negatively affected by the current challenging environment; it has reported multi-year declines in total enrollments and operating profitability rates. Apollo Group has a more optimal mix of degree candidates, however, with over 70% of students pursuing bachelor degrees or higher. It also has greater reach with thousands of potential employers through its Workforce Solutions network. More importantly, the company has a strong financial profile and is capable of funding the future capital investments required to meet the government's rising standards.
The bottom line
Career Education has wisely reduced its operating footprint, raising cash for vital reinvestment back into its domestic operations.Until the company finds its way back into the black, however, investors should leave this evolving story to the speculators. As always Foolish investors should do their own research before making any investment decisions.
Robert Hanley owns shares of Education Management. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.